Newbie investor looking for financing tips

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Newbie investor looking for financing tips

Adam Smugala
Member since 2021 · 7 posts · 0 votes

Hey BP community!
I'm a new-ish investor, looking to build wealth through investment properties.  I've been doing lots of "window shopping", figuring how to build the business, etc. and getting to a roadblock on financing (the elephant in the room).  Here is my current position:

-I have a full-time job, making $80k/yr (single income, wife and three kids)
-I bought my primary residence 1yr ago with 20% down (so minimal equity)
-I partnered with my parents and bought the neighboring property that was split off my property and it currently has a renter in it
    -this property cash-flows but not significantly due to the renter paying under market-value to the previous owner and she is a friend, takes care of our kids, etc, so we want to keep her there.  Acquiring the property was more to secure the property and not have neighbors.  My parents may buy it out long-term, freeing up my capital, but that is TBD
-I have no other debt other than my house and the rental
-780 credit score

With that said, getting financing for my first "real" investment property feels daunting. Since I bought my house and the adjacent property, there is very little equity to pull out of either property and buying both took most of my cash. Being single income and with my expenses, I can't save tons of cash and it would take years just to get a down payment. I'm looking for advice from this large pool of professionals on what my best option is get my first deal done. My investor pool is quite small, I've considered personal LOC for a down-payment on a conventional loan (not sure this is even feasible). Any input for a lowly first-timer is greatly appreciated.

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  • Bonnie LowPro Member
    Lender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    Here are a few thoughts: your income is good and your credit is great, so you have both of those going for you. How's your debt-to-income ratio because that's the other big factor lenders are going to look at. Personally, I wouldn't have put 20% down on a primary residence because it ties up your cash, but I'm assuming you didn't want to pay PMI. While that 20% gets you out of PMI, it doesn't leave enough equity in the deal to pull any cash back out because most lenders are wanting you to have at least 25-30% equity in order to do a cash out refi.

    Since you have a good job, do you have a 401k? If access to cash is holding you back, consider taking a loan from your 401k to use for your down payment on your next property. I've done this a few times. At 5% interest, it's higher than an FHA loan but lower than almost anything else and I pay that interest back to myself.

    Are you wanting to stay in your current property or would you consider renting it out? You could go with an FHA loan on the next one and only put 3.5% down, reducing your cash out of pocket to get into it but you have to be willing to owner occupy, at least for a year or two (though circumstances can and do change - you just have to go in with the intent of owner occupying.)

    Have you considered buying a distressed property and doing a BRRRR? You could use a hard money lender to get into the property, rehab it and pull most or all of your $ back out. You may find a HML willing to lend up to 100% of the purchase price - they exist but fees tend to be high - you just have to shop around.

    You mentioned your folks may buy you out eventually. If they have the $ to do that, would they consider lending you the down payment on another property or going in partners with you on the next one? There are lots of ways to get into another property if you get creative. And remember that you're not limited to just one method. Consider a combination of options. For example, you get a HML to fund 80% of the purchase price of a distressed property. You you ask your folks to front the 20% down payment and you use a 401k loan to fund repairs. If you haven't already, check out Brandon Turner's book on investing with low and no money down. If you don't have a lot of cash sitting around but want to keep building your portfolio, you have to get creative. You're only limited by your creativity and your risk tolerance.

    [email protected]
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  • Adam Smugala
    OP
    Member since 2021 · 7 posts · 0 votes
    5y

    @Bonnie Low My DTI is pretty low (28%)
    I put the 20% down on my primary to reduce PMI (this was also before I wanted to get into investing so I was only focused on reducing my monthly payment)

    I have several 401ks totaling around $50,000

    We are planning on staying in this current house long-term so FHA/househacking isn't an option

    If I could get 100% financing through a HML and BRRRR that would be amazing, I just don't know where to find said HML

    I didn't think about partnering with my parents for a second deal, but that might definitely be an option.

    I'll check out Brandon's book.  Thanks for the input.

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