Using personal funds for entire house purchase - it is smart?

Question

Hi there. I want to purchase my first SFH to rent. Purchase price will be around $100k. I'll receive at least $1k month in rent. I am 30 y/o. I work from home full time.

I am having a lot of issues trying to work with banks for a loan and find they slow the process down considerably. I am wondering if using my own money to purchase the first home would not be a good idea.

I have over $100k in personal cash I could use for a deal. My thinking would be that I could purchase my first rental and have 100% equity, and then use this as leverage to receive a bank loan for another $100k house about 6-12 months later; all the while any rental income less expenses can be put into a savings account to be used for a next deal 6-12 months out - and repeat this process until I can get to 10+ SFHs.

I welcome the conversation on this topic from this community. I know some people would say never use personal cash, but since this is my first deal it may set me up to receive loans easier in the future while making more money on the first deal to help pay for more purchases.

My second option would be to use my personal home as collatorel but that scares me frankly. While I was lucky enough to pay my mortgage on the home off in 2014, leaving me with a $200k asset to borrow on, I am just not sure if it is needed for my first (or second or third...) deal.

I appreciate your thoughts...

James De Silva · Answer

I don't believe the community is against using your money to purchase the property, but we recommend not leaving your money IN the property.

The simple example is, say you buy a property for $80000 with your own personal money.

Then as you said, in 6 months to a year, you refinance it and because you (hopefully) bought it undervalue, you appraise at $100k. You get 80% of that back, so you're back to having $80k. So you never 'spent' your money really. You just parked it somewhere to come back to it.

Robert R. · Answer

Banks are a pain. We purchased our home all cash last year. Also purchased 2 rentals which we make a ton off of. Even with our 790 and 780 banks won't lend to us. They insist on the magical w2. We make more money than most people in town do with a w2 but the banks don't care.

If they won't lend to you now, how do you know they will a year from now?

Good luck with your decision. Neither is the wrong one.

Jean Bolger · Answer

Nothing wrong with that idea, IMO. Sometimes it is easier to refi later than to get a mortgage to buy. Bear in mind that many banks  (not all!) will not count  rental income until you have been a landlord for two years. So you do take the chance of having that money trapped in the rental house for a while. Unless your income is plenty high and you can qualify without using the rental income.

You might think about getting an equity line on your house. That would allow you to access the money to buy a rental and still keep plenty in the bank. I get what you're saying about not wanting to use the house as collateral, but if you have the cash sitting there it is not a risk. You're paying to borrow, yes, but you're also allowing yourself to keep that liquidity.

Michael Thompson · Answer

I think it depends on how comfortable you are with risk and that's all debt really is.

Frank Woodin · Answer

I don't know how many banks you called so far but I would call until one says yes.  If you have good credit and seems you are sitting on a pile of money you should be seen as a good credit risk.  The last time I was looking for a bank that would be a portfolio lender that would allow seller carry back financing for part of the deal it took me over 20 banks for me to find one who would lend.  (most of the time I was just explaining what seller carry back financing was, I was astounded by how many bankers didn't have any idea about it)  The moral to this story is call as many banks as possible then take the best offer for what you want to do.  You will do much better with your return on investment if you were to leverage your investment with a 80/20 loan, especially since you are so young and have a long time horizon.

Gilbert Dominguez · Answer

Lets say you do buy a $100K house and you do get $1K per month in rent. You will still have some closing costs, insurance, and maybe some maintenance cost associated with owning your rental house. When you go to refinance that house most banks will not lend you 100% of your equity but may limit what they will lend to between 65% to 90%.

Let us say that you find a lender that will lend you 80% so you can take out $80,000.00. You will not get exactly $80,000.00 because there will be loan origination fees and other fees you will have to pay. So then now the rents may cover your payment plus your other expense, any taxes, insurance, escrow fee etc.

Essentially you can accomplish the same with your very first rental house. You just need to find a lender to work with you on your terms. It may take a while but you need to shop around. I honestly do not see the issues you are referring to since you own your house outright and you also have $100K in cash available to you.

In any case you should be able to count your rental income as your income after about 2 years.  I would say that with you owning your own home outright and a good credit history would put you in an ideal situation to keep purchasing more properties.

Chris Holmes · Answer

At least you don't have to worry about banks on that deal. That's the good news. My input on any RE deal, keep banks out of your life. There are some good reasons why I say that. You just have to figure out how to do it. Creative financing is a very powerful way to buy RE. Why? You are not on the hook for the loan and you have zero risk,. But unfortunately the herd effect here will convince you to use banks to finance your deals. That's not good advice. But it's your life. Good luck.

Adam Spencer · Answer

You could use your cash to buy the property then once you prove that It cashflows after 6 months go to the bank and refi.   Check out info on the BRRR strategy. I would also look into getting a HELOC on your home.  You have a lot of equity in there that you could be using on deals.

Using personal funds for entire house purchase - it is smart?

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