How do you break the cycle?

Question

Good morning everybody! I feel like i need advice.  First i'll tell you a little about myself.  I'm 34, i've been in the construction trade all my life, i'm a very skilled electrician of 16 years.  I've also grown up around the remodel scene, as my father has a remodeling company.  It's been my dream to get into real estate since i could remember.  Because of my background, ive always been interested in the buy and hold, and the fix and flip side of real estate.  I currently hold a 9-5 job you could say, i do access control, data communication, and security camera installation.

I dont have great credit, and i've been trying to figure out how to go about getting that first property.  I don't have the savings for the typical 10-15% downpayment.  So how can i break this cycle and get started?  Fixing my credit seems like it will take years and years of payments(i don't have much credit, other than one credit card).  I feel like once i get started, the ball will start rolling, i think i have the skill and motivation to succeed.  What are the different ways to get funding with low credit and little capitol?  What are the options?  Where do i start?

Teri Feeney Styers · Answer

@Douglas Rath have you actually approached a mortgage lender and had them spell out where your shortfalls are? Exactly what you need to do to become mortgage worthy? You said it "seems like" it would take forever - yet you only have one credit card and a decent job. Where are you living? You don't need 10-15% down to get into a 1-4 unit property if you are willing to live there. I assume you are paying rent. I don't know the Jacksonville market but I'd say you need a great mortgage broker and a hungry real estate broker who are willing to guide you... If fixing and flipping is your goal then start with a live-in flip. Hold it one year to make the mortgage company happy or two years and that is tax free money in your pocket. Rinse and repeat a few times.

Mark Shaver · Answer

A list from Mike LaCava's article "6 Ways to Flip Houses With No Money":

• Real Estate Investor Partners
• Hard Money Lenders
• Private Money Lenders
• Real Estate Wholesaling
• House Flipping and Crowdfunding
• Seller Financing

My explanations

Some strategies don't leave real estate on your property. But you get the money and experience to find the right property. It's better than just working 9-5 year after year.

An elephant

The old joke says “How Do You Eat An Elephant?: One Bite at a Time”.

1st bit. Learn to find a property for 50% of ARV (After Repair Value).

Resell the information to an investor. Get your 1.5% of ARV. Do it several times.

2nd bit. You are already able to find the real estate for 50% of ARV.
 Now you have to learn how making the estimate of repair. (See the Chris
 Feltus's article "The 70% Rule").

And now you have to learn how to look for builders willing to buy the
 house and make repairs. (Dad? Dad's construction friends? Construction 
friends of your friends?)

The builder-buyer gives you half of the profit (30% of the market 
price). Of course, you will not have a property after repair. :-( But 
you will get 15% of the market price and experience. :-)

Repeat the second step 5 times to collect 75% of the market price in cash.

3rd bit. Find a new property again for half the price. You already do
 it easily. You buy and repair. You use the money you've saved up 
before. Soon you receive the repaired real estate with a 100% market 
value. You'll still have a 5% cash reserve. Bingo!

The percentages are conditional. The principle "One Bite at a Time" is important.

Image via Pixabay.com

Andrew Syrios · Answer

I would really focus on your credit first and foremost. Talk to a mortgage broker or get with a credit counselor and make a plan. The best way to start would be with an FHA or 203K loan. You have to live there, but you can buy up to a fourplex and only have to put 3.5% down. And while you will have to pay mortgage insurance, the interest rate itself is really good.

David M. · Answer

@Douglas Rath

Have you looked into how to get your credit score up?  Remember, its not necessarily about having debt (i.e. credit card debt).  Its about creating a credit HISTORY.  Maybe you need a to get three credit cards and use them, but pay them off every month.  Sure, getting a mortgage, car loan, etc. can be counterintuitive and not be helpful in other ways, but its about creating a positive history of being able to handle payments and credit.

Have you really talked with some good lenders about possibilities?  Regarding down payments, Conventional loans can go as low as 5%, FHA 3.5%, and USDA 0%.  Sure, the Federally backed products come with higher inspection criteria so you can't buy the crappiest property out there, but its a way to get started.

I don't know your market at all, but perhaps you should get a single family or multi-family as a long term rental.  It will create a mortgage history that will help your credit score and you can generate some cash flow (assuming you find a good deal).  You may be able to find a fixer upper and cash out refinance.  I do agree with the other posts that flipping would be a way to generate some capital, but perhaps slow and steady is the race you want to be in.

Oh, I'm assuming here that when you say you don't have great credit its NOT because you have judgements against you, debt problems, etc.  In my opinion, you need to be on decent to solid financial footing to invest.  So in summary, maybe you need to create a positive credit history, look into other traditional financing approaches (as an alternative to partnering and HML), and break the cycle in a slow and steady manner.

Evan Polaski · Answer

@Douglas Rath since you already have a valuable piece of the puzzle achieved, understanding remodels, costs/work required, etc, your next step is to find an investor and get at least warm interest.  They likely won't commit until you have an actual deal lined up, but no point in lining up a deal without some level of confidence that the money will be there to execute.

For my wife and I, we did have some money, but not enough.  We brought in a financial partner for the shortage.  Then the profit split was 50/50 to manager/equity.  So technically, my wife and I got more than 50% because we had equity in it too.

In terms of finding deals, they are out there.  I would be patient for a market you know really well.  We chose the neighborhood we live in.  And you really need 3 pieces of info.  What will the end project sell for?  How much will it cost to get there (don't forget about the sale costs, 6% commissions, closing cost assistance, etc)? How much profit do you want to make (as % or $)?  Sale price(ARV) - cost - profit = offer price

Obviously, starting out, the more work you can do, the better the margins, and I would offer your labor for free to the investor, since it will ultimately help their return and help sweeten the deal to take a risk on you.

Now, where to find investors?  I would start with local meetups and REIA meetings.  Talk with local agents, they may have investors looking that want someone to partner with.

Caleb Brown · Answer

Partner with an investor for flips. There are people with money who will fund you and then split the profits.

Brent Fabian · Answer

Flipping is going to be the best thing for you to get in the game the quickest and build some capital.  Hard money lenders will lend sometimes without doing a credit check or don't put much weight on it.  They are more concerned with the #s of the deal.  That is going to be your best bet to get started I think.

How do you break the cycle?

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