Trouble funding my first deal

Riverside, California
General Real Estate Investing
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Trouble funding my first deal

Michael Lonsdale
Investor · Inland Empire/Palm Springs · Member since 2020 · 14 posts · 7 votes

Dear BP Community :),

LONG Time reader, First time posting! I've read, listened to, watched, and soaked up as much info as I can from this site over the last few years. Incredibly grateful for the people responsible for this site. 

I'm having trouble funding my first deal. (Well, not really my first deal, I've owned one rental before)

Background- I own a primary residence that is worth just over 500K. I have about 120K in equity in the house. I have a 720 credit score. My W2 pays me over 120K a year. My rate is in the low 3s. My job is new so I hardly have any money saved up. 

Problem- I want to start BRRRing but I don't have that initial 10% down to obtain a hard money loan. Obviously, I need that bit of seed money to start.  

Where I'm at- The last few months I've been working to obtain a HELOC on my primary residence as the seed money. Then I'll work to get a hard money loans, so I can start BRRRing. But I can't get a HELOC to close. I'm told my equity is just not enough yet or that I need to show two years at this job. I've gotten tripped up during final underwriting 3 times now.

What should I do to get my initial money so I can start BRRRing and be able to put 10% down?

A. Continue to pursue a HELOC. (If so, recommend someone for me to talk to)

B. Obtain a personal loan and use that money to get a hard money loan and start the BRRR process. (Recently leaning towards this, any suggestions on where to look?)

C. Sell my house and use that money to start investing. (I've owned the house for 13 months) 

D. I was considering a cash-out refi but my rate would almost double. So I'm not sure that makes sense. 

E. Something else, please let me know what I am missing! 

How can I get this initial seed money to then get hard money loans? 

Please let me know what my next move should be. Thanks in advance to anyone who provides suggestions. 

Respectfully, 

Mike

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Leo R.
Investor · Member since 2021 · 591 posts · 695 votes
3y

@Michael Lonsdale I'd say go with option F: forget BRRR'ing for now (it's pretty risky given the current market, and even experienced pros are failing to hit their ARVs), and instead buy a new primary that you'll house hack (if you want, you can do a live-in BRRR). You'll get much better financing terms, it will greatly increase the number of properties available to you that pencil out, and it's lower risk than BRRR'ing (esp. BRRR'ing on hard money). Plus, when done correctly, a house hack will lower your expenses while increasing your income in a single step--the fundamental key to building wealth.

Good luck out there!

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  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    3y

    @Michael Lonsdale you are welcome ....fyi - many loan officers / mortgage brokers dont specialize in HELOCS ....they focus on 1st mortgages .....so many loan officers / brokers ( not all ) will likely not have any great HELOC options ......there should be some lenders offering cltv of 85% maybe even 90

    Good luck

    1Reply
  • Michael Lonsdale
    OP
    Investor · Inland Empire/Palm Springs · Member since 2020 · 14 posts · 7 votes
    3y

    Good points here. I think this is what caused my HELOC to move so slowly. I wasn't working with a specialized lender. I was working with very traditional lenders who focus on single-family residential houses.

    0Reply
  • Jon KellyPro Member
    Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
    3y

    @Michael Lonsdale what hard money lender are you using? If someone is willing to offer 90% initial / 100% rehab budget for your first deal then you should jump all over that. 

    I work for one of the largest private lenders in the country. We offer 70% initial / 100% construction holdback for first time rehabbers. We offer 90% initial / 100% rehab to rehabbers with 5+ rehabs on their track record. 

    0Reply
  • Marty JohnstonPro Member
    Lender · Wauwatosa, WI · Member since 2016 · 570 posts · 203 votes
    3y

    @Michael Lonsdale

    Some decent responses here, but a few comments to add/echo:

    1. What was your source of income prior to your current primary? And what might your 2022 and 2021 net taxable income look like? (close to new job? Half? Less than that?). Reason I ask is I do often recommend unsecured debt for gap funding on BRRRRs and developments as its a perfect resource and use case for your situation, the problem there is these personal loans don't just look at current W2 income, but they are usually looking at your last 2 yrs tax returns (line 11 of your 1040), and use that 12-mo average from prior year to determine qualifying income for calculating DTI, Credit utilization, etc. So if your 2022 tax return will look good, I'd recommend filing sooner than later and you might qualify for a bit there! This is my favorite, as you maintain 100% of your equity, its fast access to capital, no prepayment penalties (so payoff when you hit the brrRr), and while costs may be somewhat higher, you save costs of title fees, appraisal, and net out somewhere even after all other mortgage fees. Math pencils out quite nicely actually.

    The HELOC is always a nice sweet spot - how far away are you from meeting the seasoning requirements there? (as in, how long have you been at your current job? or had a 24-mo employment history as full time W2?)

    [email protected]414-600-0123
    0Reply
  • Michael Lonsdale
    OP
    Investor · Inland Empire/Palm Springs · Member since 2020 · 14 posts · 7 votes
    3y

    Thanks for the response @Marty Johnston

    Two things I was hoping you could help me understand better

    1. When you say 'unsecured debt for gap funding'... are you referring to a personal loan? 

    2. What do you mean by gap funding? Funding the entire purchase of the house in cash? Funding the renovations?

    Thanks again for your insight and opinion

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