Finance Options Available For My Situation?

Question

Hi all,

After listening to podcast episode 200, I figured I'd go ahead and start asking some questions since I'm completely new to buying real estate for rentals.

Here is my situation, and 1 of my questions after listening to the podcast is finding out what finance options are available to me.

My case:

• I own 1 home that is my primary address that I live in.
• I currently have no debt and have about $8,000 saved in my housing savings account
• My main objective in real estate is to purchase either single family units or duplex units to rent out to eventually pay for my primary home's mortgage month to month.

I currently live near Chattanooga, TN and want to invest in properties in that area or near it.

Not sure what else to list here...again completely new, and any advice is appreciated to start me in the right direction.

Thanks

William Allen · Answer

@Robert Smith, some great advice here from some local folks in the area.  Take them up on meeting with them and figure out how to find deals and get into a property.  You will learn the most by doing it, great education!  I would agree with what's been said, utilize conventional financing if you can.  That's how I started, saving up for down payments on rentals, then I would flip one, use the profit for a downpayment, repeat.  After that I started raising private money to use to purchase my rentals from friends and family.

Lots of great options in real estate.  @Jimmy Moncrief is a great local commercial lender contact who can help you with investment properties as well.  Good luck!

Mike H. · Answer

So I would ask/suggest a couple of things:

1) re: HELOC (home equity line of credit)
How much do you owe on your current house and how much do you think its worth?
You can typically get a heloc on up to 80 or even 90% LTV on your primary residence. Its cheap money and you're going to need more cash than what you have now in order to invest.

I started by taking out a heloc on my primary residence of 43k and then I probably had another 7 or 8k in the bank like you do now. Fast forward 9 or so years and I have 66 homes today.

If your house is worth say 150k and you owe say 90k, then you can probably get a heloc from 30k or maybe up to 45k.  Its cheap money and you only pay interest on it if you're using it.

2) First few loans should take advantage of conventional cash out refi's.
Unless you have access to a couple hundred grand in equity, I would start slow and take advantage of conventional cash out refi loans to stretch your capital as best you can.

Lets say your first deal is to buy a 120k house for 70k and it needs 15k in rehab. To buy that with a conventional loan, you'll put down 20% or 14k plus pay the 15k in rehab out of pocket. So it'll take 29k in cash to do that deal. But then in 6 months, you can turn around and do a cash out refi on that house for 96k and you'll be able to pull that 29k back out plus get an additional 7 to 10k in profit as well.

Now that sounds easy but it requires you finding a really good deal. In addition, you can only do those conventional cash out refi's 4 times (or maybe 6 thru freddie)?  But one reason I would strongly suggest you do a 30 year conventional mortgage versus the 15yr loans is for the cash flow.  There is a significant difference in cash flow when going from a 15 yr mortg to a 30 year. When you're first starting out, you want as much cash flow as possible.

95k loan at 15 yrs and 4% is 702/mo.  Payment on 95k loan at 30 years and 4.5% is 481/mo.   Thats 220/mo additional in profit. And you'll want every penny of that. If you find you don't need that much, you can always pay more towards the principal when you make your payments. But once you lock in on the loan, you're stuck.

That would be my recommendation. First and foremost you need to have more cash to do buy and hold - at least your first couple deals. Once you get some experience, then you can look at hard money lenders to try to stretch your capital and grow faster - which is how I did what I did.

The benefit to using hard money is that if you can find a good one that does 100% of the purchase and rehab, then you can establish a loan amount and turn around and do a rate/term refi on it without having much out of pocket at all.  Once you get past that 4 or 6 number or whatever that cash out refi limit is, you'll be hard pressed to do cash out refi's going forward. They're still possible but banks and their auditors tend to frown on seeing an investor doing too many of those.

Jimmy Moncrief · Answer

Thanks for the recommendation @William Allen!

You could get a mortgage anywhere @Robert Smith however I would think about who you want to grow with and who you want to grow your business with.

Of-course I am biased.

@Robert Smithundefined

David Grabiner · Answer

@Robert Smith Hi, great to see you on here so fast. In your situation you probably can easily get a traditional mortgage from any bank around. It will have a 30 amortization and around 5% interest rate but they will require a 25% down payment. I suggest that you keep learning, keep asking questions, talk to lenders, look at properties (gcar.net/home will give you all the homes that are listed on the MLS in the area), analyze the properties, and all the while keep saving up more money for a down payment.

Wes Harrington · Answer

@Robert Smith, these guys have some real wisdom.  I too live in Ooltewah. We should connect.  Would love to sit down and have some coffee anytime.  Feel free to PM me.

hope to hear from you soon

Wes

Pearce G. · Answer

Home Equity Line of Credit - Basically borrowing against the equity in your home, but you don't have to borrow it all at once.

Let's say you have a 100K house completely paid off.  You can probably get a HELOC for up to 80% of the value or 80K.  But maybe you only need 20K for a down payment on a rental property.  You would only service the debt on that 20K that you used.  The other 60K would be there if you needed it, but you wouldn't pay interest on it until you use it.

Robert Smith · Answer

Hey Pearce, no sorry, I do still have my primary residence to pay off. What does HELOC stand for, and how does it work?

Pearce G. · Answer

You own your home and have no debt?  Does that mean you own your primary residence free and clear?

Assuming you have a day job, a HELOC could help you raise a little extra cash for a down payment.  But go slow with a HELOC.  I don't want your personal residence leveraged to the max just to buy an investment property.  Allow yourself some buffer for when things go sideways.  As you build your portfolio, you can spread that risk over multiple properties and pay off the HELOC.

Robert Smith · Answer

Thanks for the advice Ben, I will definitely look into those avenues.

Ben Van Gaasbeek · Answer

Robert,

Sounds like you're on the right track.  You've taken good steps toward widening your income and asset base.

Financing is less complicated than you think.  If you're looking at 1-4 unit properties, I would talk to Ryan Henn at Tennessee Valley Federal Credit Union on Market Street (you should be able to google his contact info).  They have a very good 15 year fixed program designed for investors of 1-4 unit properties with aggressive rates.

You also have access to some nationwide programs, but they typically require a lot more money put into the deal than you have available.  These programs will extend out to 30 years fixed, but have other requirements and restrictions that may not work for you.  Talk to someone at Mortgage Investors Group on Shallowford for more information.

Another way to acquire properties is to team up with another investor.  I put investors together all the time.  Feel free to reach out if you have more questions about that type of project.

Keep saving and researching!

Ben

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