Use my own cash or alternative financing?

Question

I have about $10,000 cash that I could use on my first investments, but I have read some posts that mention leveraging other people's money is a better way to go. I'm looking for some opinions on this. We have about $150k equity in our home, but my wife is not comfortable tapping into that cash and would prefer to use the $10,000 that we have in savings.

I live in Canada and would like to invest in a market that is close to me where I can still buy houses between $100-200K. I'm interested in buying a home or two, and lease optioning them out to tenant-buyers.

Any thoughts on how I should move forward?

Thanks

Jeff

Roy N. · Answer

Jeff:

Somewhere on here I have a lengthy post about using vendor financing (a vendor carry) - I'll try to search for it.

A vendor carry for either the whole amount of the property (minus downpayment) or just a portion, can be advantageous to both the buyer and the vender.  However, in residential properties the are not terribly common.

The first step is to find the correct vendor:

• they need to own the property free and clear;
• they do need immediate access to their capital;
• they are interested in turning their property into an annuity and earning extra interest income and/or they are interested in deferring capital gain (if not a primary residence) over a period of up to five years

If you are buying from Dick or Jane Homeowner, you will most likely need to educate them on how a vendor carry works.  Since they will not be paying capital gains, there is less motivation to not take all the money up-front (unless the interest rate is beyond what they can earn otherwise).   If you are buying the property from another investor (older, tired landlords are often good candidates), then there may be a significant capital gain coming to the Vendor which can be more motivation for a vendor carry.

In the commercial world, a vendor carry as a second mortgage of a portion of the sales price (typically 10 - 25%) in combination with conventional financing is not uncommon for a vendor trying to sell into a tough market or divest of a property at a specific price.

The key in recruiting your Vendor into a Vendor Carry is to solve a problem for them and put their interests first.

Brent Coombs · Answer

@Jeff C., Lenders still want to see that their loans are "safe", meaning that you will not readily get 100% financing from anyone - for the long haul. Yes, Hard Money Lenders will sometimes do that, for outrageous Interest Rates, but will be expecting you to either get a traditional loan within short order to pay them back, or have been told by you that you are selling it straight away for a profit, thus will expect immediate pay back on resale.

Neither of those situations seem applicable to you though, right? Which means, achieving your stated goal will require not only you using your $10k, but a significant chunk of your current equity too (ie. result: unhappy wife). Unless, someone can suggest some magical alternative...

Samuel Sedore · Answer

I have some connections in the RTO(rent to own) industry if you have an idea of which area you would like to start in. There are several markets that fit that criteria, but don't buy somewhere just because its cheap, you will end up with tough tenants and no appreciation. But to be blunt 10k is not enough to do anything with on your own, you can easily leverage other peoples money, but don't get caught up in these sales pitches out of the states our market is way more expensive and our banking system does not allow just anyone to buy.

I would say when looking for other investors to pitch in cash, you need a track record. Just ask yourself, would you invest money in real estate with someone who has never done a deal before? I just closed my first JV deal I would say it took about a year after my first investment property before people stopped discounting my knowledge, money talks.

I would have a sit down with your wife and show her the benefits of REI, I can send you a spreadsheet if you would like to drive numbers home. But take out enough equity out of your home to cover the 20% down payment on a rental, and in 2 3 years when you can show the results, Friends and family will be chomping at the bit to have you help them invest their money.

Good Luck Jeff!

Jeff C. · Answer

Thanks for the comments @Assata Moore and @Roy N. Much appreciated.

Assata Moore · Answer

@Jeff C. I agree with @Jason D., 10K is not a lot of money. It seems like waiting, at least a year, would allow you to:

1. Assuage (and at times massage) your wife of REI. She needs time to research at her pace; don't push, gently shove 😉!!

2. Have more liquid that will be more attractive to any lender, conventional or HM. This doesn't mean you would have to use it all, but if needed, you have it.

3. Learn more about REI in your country and local area. Many responses we are giving may not be applicable because of different laws.

I understand the energy of wanting to get started because of the excitement and opportunity of REI, however I've also learned how to wait by being forced to wait. Also, put the 10K away and don't touch it!

Good luck,

Roy N. · Answer

Jeff:

In theory you could, but in practice you will need to find a Vendor with an assumable mortgage. Next, the lender will vet you as if you were applying for the mortgage yourself prior to deciding to sign-off on your assumption.  Here in Canada, most lenders will only go along with this if the purchaser is an owner occupant.  I suppose if you have a good track record with a lender they might allow an assumption on a rental property if the LTV was low enough.

Alternatively you could try a "wrap" with the owner/Vendor.  In this scenario you purchase the property "subject to" the existing mortgage and take over making payments.  You will read about this strategy frequently on BP.    We have no first hand experience with a wrap/subject to purchase and I'm not sure how well it would work in Canada.  If the lender did not invoke the due on sale clause and accelerate the mortgage, you would need to be ready to finance on your own when the existing mortgage term was up (typically <5-yrs).

Jeff C. · Answer

Thanks Roy. Great post.

Given that I need more than $10,000 towards a down payment on pretty much any home in Ontario, couldn't I negotiate with distressed sellers and take over their mortgage payments instead, and then lease option or rent out the property to a new tenant?

Jeff C. · Answer

can anyone weigh in on the advantages of using seller financing in Canada. Can it be lucrative to buy an investment property with seller financing, and then lease option the property to a tenant buyer? Or would the premiums associated with seller financing likely kill any profit that comes from a lease option?

Roy N. · Answer

@Jeff C.

@Doug Pretorius does the lease plus purchase option (aka: rent-to-own) as his principal investment strategy.

Roy N. · Answer

Mark:

The OP is from Canada and in this country retirement accounts can hold {Canadian} mortgages, but not actual property.

Use my own cash or alternative financing?

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