How to determine HOW MUCH I can afford to buy?

Question

If my goal is to buy turnkey, rent and hold or maybe, BRRRR, with little to no money down- then how do I determine how much I can afford in a piece of real estate? I cannot afford to risk losing my salaried income, but I am willing to risk losing what I invest, given that I am not investing from my personal budgeted income/expenses. How does one balance or calculate this risk-reward ratio?

Bridgette Delva · Answer

Hi @Nicole Simmons I agree with Derrick in that one of the best ways to determine how much you can afford is to speak with a lender since income, credit score, down payment, owner occupancy all play a role in determining your options.

I am not sure what you mean by you are "willing to risk losing what I invest" but I would say that is definitely not the best mindset to start investing.  You should to approach every potential investment deal with a thorough analysis to determine if it is worth it.

In terms of getting started, house hacking can be one of the lowest risk options so you could try to find a duplex or small multi-family.  BRRRR is also a good strategy but it's not as low risk as house hacking since you need to know (or learn) about renovations; this alone can make it slightly more risky than house hacking mainly because rehab costs can get out of hand if you're not experienced.

If you're considering turnkey, that is definitely a lower risk option but usually not as high of a cash flow as house hacking or BRRRR since you're paying someone else to do all of the work.  In any of the scenarios, you need to do the analysis to determine if the deals cash flow and let the numbers speak for themselves.

Derrick Dill · Answer

Simple answer is go see a lender, get pre-approved. There are many variables. How much down payment do you have? what's your credit score? Will it be owner occupied? The less you put down, the more your monthly payment will be in general.

owner occupied can put down 3.5% down FHA, while rentals I've always put down 20%, but i've read on BP some lenders will give 5% down option.

Account Closed · Answer

So lets say you have 25,000 dollars to invest. At 20% down plus closing costs you can buy say a $120,000 dollar house that may rent for $1200. But you also need to have say 6 months of reserves so say 7K. So actually you really have 18,000 to invest and maybe you can buy a house worth 100K. Rough numbers for example only but you should get the idea.

David M. · Answer

@Nicole Simmons

Oh, just Google it or search BP where you'll get a ton of posts.

In short, wholesaling is selling your "right to purchase" a property.  For example, lets say you find this great investment property -- whatever kind...  You talk to the owner and you get them agree to sell it.  You two sign a contract of sale say for $100.  Then, you run and find an investor and for this example say its me.  You tell me the deal and say that you will assign the right to purchase to me for some amount, say $5.  Now, you make $5 without ever having used any money (well, except some sort of deposit perhaps to the seller) nor having taken Title to a property.  Meanwhile, I get a ready, willing seller of an investment property for $105.

A little extra background.  I've never wholesaled nor worked with one.  My understanding is you need to or should disclose to everybody, or else somebody is going to get mad.  Its basically legal since you aren't in the business of brokering the sale of real estate; you are selling or assigning your rights to purchase a piece of real estate.  And you really better be able to assign to the contract to somebody or else you are stuck buying the property or defaulting on the contract of sale.

All that being said, I think its a little different than what you are asking.  But, the aspect of finding a deal and an investor sounds like the same as what you clarified as your question.

Make any sense?

Nicole Simmons · Answer

@David M. Looks like I'm going to have find out what "wholesaling" is! Thank you for the words of wisdom and caution!

David M. · Answer

@Nicole Simmons

Well if you don’t have the money, you need to figure out some parameters that your potential partner (which could be a pool of potential partners) would be interested in investing.  Sounds like you are almost wholesaling...

Since you aren’t controlling the purse strings, you need to understand what situations will open those people’s purse strings.  There is a whole range of factors to be considered.  If people give you wishy washy answers, they either aren’t serious, have too much resources, or aren’t very good at this or need some discussion to help focus what they would be willing to invest.  I tend to wish the latter was more so true when I meet potential investors, but I find it’s more the other reasons.

Nicole Simmons · Answer

Thank you all for the input. Even though I have purchased 3 houses of my own, I guess I see REI as an entirely different ball-game but have forgotten that it's still very much the same process, just with a different purpose. I will be undergoing refinancing and I will discuss with my lender than what I can afford.

I guess my question was really more relating to if I partner up with someone or if I am NOT the one coming in with the money, then how do I go about researching properties or determine the price-point in order to research deals to find a good one to pitch to a potential partner? I hope that makes more sense and clarifies my initial question. Thank you again!

David M. · Answer

@Derrick Dill

You can do conventional loan as low as 5% down. If one as good credit (say better than 740’ish), the conventional loan will be cheaper than fha.  Fha is really for those with poor credit and/or can’t make it to 5% down.  For some reason, people see to keep overlooking looking the conventional loan with less than 20% down.  Another upside is the pmi comes off a conventional loan.  The govt backed loans the mortgage insurance never comes off.

Derrick Dill · Answer

You put down the 5%. The lender 95%. This is not the norm, but I've heard it done in BP. The norm for investment properties for me has been 20-25% down. For primary residence have different lending terms

Daniel Taylor · Answer

Are you talking about mortgage lenders or hard/personal money for the 5% down?

How to determine HOW MUCH I can afford to buy?

Most Popular Reply