What are some potential ways to finance this first deal?

Question

Hey BP family! I've got a reason to make my first post (of many, I'm sure) seeking your wisdom! Here's the gist. A friend of mine is selling her late husband's rental property, which is in a state of somewhat disrepair, in the north Houston area. The previous tenants lived there for 10+ years and paid around $800 for rent without an increase. When they vacated, they left lots of trash, old furniture, a ping pong table, etc in the house; mostly just garbage to be cleared out. The home could use some new floors, paint, updated appliances, yardwork, but no major problems as far as I'm aware. My friend mostly just wants to be rid of the property, as real estate was her husband's gig, not hers. Once fixed up, I believe the house would be worth between $130-140k (according to Zillow), and rents to be at least $1,100 per month. My wife and I are very interested in purchasing this single family home as our first real estate investment, if the numbers work. I know we'll have many questions along the way in regards to this property (how to manage, rehab, etc). But right now, my first question is: what are some suggestions on ways we can finance this deal. My friend had already mentioned she is not interested in owner financing. She wants to be rid of it! But not get screwed, if course. My wife and I have $40k or so saved in the bank not doing much and very good credit scores. So, what do you think? Thanks so much in advance!

Shera Gregory · Answer

If you can do the purchase and rehab for $100k or less then you should be able to get a bank to finance 100% of your money so you do not have to use the $40k at all (in the long run). In the short run I would look for private money or even hard money for the purchase and then use some of the $40k for the repairs and/or a portion of the purchase cost. Once you have a renter in place you can get a "regular" mortgage and pay off the private/hard money lender. That should work if you can do what you need to do in just a couple of months. And be sure to reach out to a real estate agent to have them pull comps for you. Don't rely on Zillow for the value. Let the realtor know you are looking for comps that approximate what an appraiser would come up with (so not a comp for the highest amount you could list it for).

Bob Okenwa · Answer

@Lee HughesIf you own your current home and have equity, you can take out a HELOC and use those funds for the down payment and repair costs if it is large enough. Or you can use some of your cash on hand to finance the down payment. Not sure what the current value of the home is, but 40k should be enough for 20%-25% down if the ARV of the property is in the 140k range. Private money from friends/family is yet another option to consider, but with what you have on hand in conjunction with good credit, you should be able to finance the property on your own so long as your DTI meets the lender requirements.

Jerry Padilla · Answer

@Lee HughesYou could do a HomeStyle renovation loan and go as low as 15% down, on an investment property. This will keep costs to a minimum.

Kerryanne Henry · Answer

@Lee Hughes I agree with the above advise...and would add. Make sure the numbers work, and avoid making an emotional decision because there is a personal relationship. Consider the cost of the debt (how much will the loan cost you?), what is the ARV range (@Shera Gregory) makes an excellent point about getting this right using a local realtor with clear guidance, use as little of your own money as possible (so choosing an option with the least money out of pocket), you'll need to have a cushion and money for the next deal. Run the numbers using the BP calculator.... or similar... play around and see what purchase price/interest rate/down payment combo makes sense for you. Hope this is helpful and good luck!

John Finch · Answer

All 3 of the above replies make really good points. I think the key is making sure your cash-flow is going to work out. You're going to get different interest rates, or have different terms of the loan depending on what entity/person you get the money from. It's possible that the interest rate in this scenario could make or break the deal. That being said, I second Bob's comment. You should should be able to finance the property with the 40k you have as a down payment.I know you mentioned it's a friend you're buying it from, and you're not wanting to screw her out of money. Of course you don't want to do that, but the numbers do have to work. One thing to keep in mind is that you're providing a solution to her - which is that you can move fast on this and get the property off her hands, and that's worth something. Keep that in mind when deciding what to pay for the house. As the other replies have pointed out, the purchase price is a very big factor in whether or not this deal is worth it. "You make your money on the buy side".

Tarik Turner · Answer

The key here is what would the purchase price be and the exact costs of the rehab? You want all in costs to be at no more than 65% to 70% of the ARV Also is the plan to sell the property or to eventually rent it out?