Financing my first property.

[Clint Cook]

I've got a lot of questions and I'm considering a couple of options:

Background:

I'm looking to buy and hold. I'm looking for long term, passive retirement income, it would be great if I could supplement my current income. My preference is vacation rentals, with a close second, being either single family or duplex units. I'm still developing my business plan, so currently I'm trying to determine the feasibility of VRs. If I can't get see a way to make VRs work, I'll move on to the family units. BTW - I have excellent credit.

Option 1:

The area and type of property I'm looking retails for around $200K. I can get about $40K out of equity in my residence. That puts me at 20% down (more if I can find a bargain). I should note that I have another $10K-15K to cover closing, and to keep things moving during lean times.

Q: Will lenders work with me on this? The property would be 100% financed, The down payment from an equity loan, and the remainder through a conventional fixed rate mortgage. Depending on the selling price I'll only have 20-22% for a down payment, not the typical 25%.

Q: Is this a good/wise way to go - borrowing against the equity in my home? I know a big part of this question is how much income will the property generate vs. mortgage and expenses, and I'm working on getting good solid numbers, to ensure I'll have a positive cash flow.

Q: If you were in my boat, how much positive cash would you need you feel good about the deal I just described - or would you not even consider it?

Option 2:

Try and find a seller willing to to do a "subject to" sell. This is a brand new concept to me, that I learned about here on BP. I like the idea but...

Q: Any recommendations on resources to learn more about buying using "subject to"? It seems a bit complicated. I've been trying to read everything I can find on BP's website, but I would like a really good in depth tutorial on all the ins and outs, pros/cons and how to find sellers and set up the deal.

Q: Sounds like there is a LOT of legal stuff to go with it, and a good lawyer is a must. How much should I plan on spending in attorney fees? Anyone know of a good resource, in Utah, to handle "subject to" buys?

Q: How do you find sellers willing to sell "subject to"? It seems like the only advantage to the seller is they are not making a mortgage payment, at the cost of whatever equity they may have in the property. Wouldn't they be better off just lower their selling price? They also assume the additional risk that if I don't make the payments on time - their credit (not mine) takes the hit. If someone approached me with this deal - first I would be very suspicious of a scam. Second, I'd have to be very desperate.

Option 3:

You know my financial situation. What other options would you pursue? BP talks about partnerships and hard money lenders etc. Maybe I lack confidence in myself - but I don't see that I have a lot that I can offer my side. I have no real experience investing, or in real estate beyond buying the homes my family has lived in (a total of 3). I can do basic upkeep on a property, but I'm not going to be able to do anything extensive. Playing the role of the landlord worries me - because of time (I have a full time job) and lack of experience managing properties (read no experiance).

The whole, how to finance my first property, is one of the biggest things that as kept me away from REI. Any thoughts or advice is welcome.

Thanks.

[Simon Campbell]

A "1 - 5 carry" is the number of years a seller is willing to continue to pay on the mortgage without getting a balloon payoff. This is the time you would be making payments to the seller. After that, you would need to get a mortgage.

As to using your equity to purchase an investment property. I know some investors who do that. I personally would not recommend it on my first purchase. If the deal goes sour, not only do you risk your investment property but you also risk your personal residence.

If you have a sizable amount of equity above and beyond what you would pull out for the investment property AND can feasibly make the payments on all three loans WITHOUT rental income, the risk is not all that great - but they are risks nonetheless.