New and Need A Reality Check

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New and Need A Reality Check

Chris Lopez
Member since 2023 · 6 posts · 0 votes

Hi everyone, 

I've been spending about two weeks deep diving into investment property.  I've been told I can qualify and I can't by 10 different people.  Now, I understand that living in the property is different than just making it an investment property and how the loans are different and the % down changes with each and all that stuff.  Ultimately, the problem that I'm having is the down payment and being able to qualify for a decent loan to get a decent property.  What really gets me and draws my attention is the stories of people using seller financing to get a loan for an investment.  From what I've learned is they find someone to give them the money on a property that has potential for excellent growth.  My question is how do you find these people???  Investors make it seem so easy!

Currently, here is where I stand:  Credit Score of 770, 60K yearly before taxes, 25k student load (on hold), and no liabilities (except the girlfriend, lol).  

So realistically, what can I actually get?  I couldn't imagine someone giving me a million dollar loan for a property with no experience in real estate even if I had an amazing deal.  

Let the discussion begin!!!





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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
3y
Quote from @Bjorn Ahlblad:

@Joe Villeneuve  Hi Joe, did not say I don't believe in leverage; said some believe in it more than others. You generally can't scale without leverage.

My primary rule is "never be forced to sell'' I'm in it for the long game and that means surviving the troughs. 

Most of us know people who were wiped out when the dot com bubble burst and again in 2005. Just don't want to be one of them. All the best!

Understood.  Trouble is, too many investors think that holding onto the same property, building equity in that same property, is actually losing money.  The greater the percentage of equity grows, the more money is actually being lost.  This is just an example of why I say percentages lie.
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  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    3y

    @Chris Lopez Welcome to BP! Things always seem easy when they have been done. Many/most of us started from where you are now, we saved money to use for down payments and grew from there. Some investors thrive on leverage others like to build equity. Personally I have never been comfortable with too much leverage and never focused on OPM. Decide on what you goals are and do what is right for you. Enjoy the ride!

    0Reply
  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    Talk to a local realtor and lender. They will give you a reality check.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    3y

    First, you need to correctly define what "seller financing" is.  What you described is a "private loan", not seller financing.  The definition of SF is pretty simple.  SF is where you don't go through conventional means (bank, etc...) to get the money to buy the property, and instead of using cash (as actual cash or from a loan) and pay 100% of the cost of that property up front, you buy pieces of the equity in that property over time from the seller, and thus bypass the need for cash...and/or a loan upfront.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    3y
    Quote from @Bjorn Ahlblad:

    @Chris Lopez Welcome to BP! Things always seem easy when they have been done. Many/most of us started from where you are now, we saved money to use for down payments and grew from there. Some investors thrive on leverage others like to build equity. Personally I have never been comfortable with too much leverage and never focused on OPM. Decide on what you goals are and do what is right for you. Enjoy the ride!

    Except that when you don't use leverage, you're paying 100% all cash for a property, you are not building equity...you're buying it. The ONLY cost of a property to the REI, is the cash they put into that property. This means the REI that pays all cash is paying full price for that property. The REI that used leverage only paid 20% (or whatever the DP is) for that property. On top of that, profits are only made after all cost is recovered, so the "all cash buyer" must recover 5 times as much cost as the leveraged buyer. Since the odds of the cash flow from an all cash buy being at least 5 times greater than the CF of a leveraged buyer, the leveraged buyer starts making their profit much sooner...and has far less to recover, with far less at risk.

    Any forced equity that is "built" from improvements made is the same for both if they make the same improvements. The difference is, the cost to the leveraged buyer is less since the leveraged buyer pays for those improvements in the loan...over time. Since the "all cash" buyer is paying out of pocket (cash), the cost of these improvements would have added to the REI's cost and delay their profits even longer.

    Any equity that is "built" after purchase (appreciation) is the same for the investor buying with leverage or cash since it's based on the property value...which is the same for both investors.

    0Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    3y

    @Joe Villeneuve  Hi Joe, did not say I don't believe in leverage; said some believe in it more than others. You generally can't scale without leverage.

    My primary rule is "never be forced to sell'' I'm in it for the long game and that means surviving the troughs. 

    Most of us know people who were wiped out when the dot com bubble burst and again in 2005. Just don't want to be one of them. All the best!

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    3y
    Quote from @Bjorn Ahlblad:

    @Joe Villeneuve  Hi Joe, did not say I don't believe in leverage; said some believe in it more than others. You generally can't scale without leverage.

    My primary rule is "never be forced to sell'' I'm in it for the long game and that means surviving the troughs. 

    Most of us know people who were wiped out when the dot com bubble burst and again in 2005. Just don't want to be one of them. All the best!

    Understood.  Trouble is, too many investors think that holding onto the same property, building equity in that same property, is actually losing money.  The greater the percentage of equity grows, the more money is actually being lost.  This is just an example of why I say percentages lie.
    1Reply
  • Account Closed
    Rental Property Investor · St. Louis, MO · Member since 2022 · 125 posts · 124 votes
    3y

    Welcome to BP. As stated, you are confusing private lending with seller financing. I find it hard to believe you wouldn't qualify for a conventional loan based on your stated credit score and income, which can require as low as a 3% down payment. Student loans are not counted as debt when qualifying, so your DTI ratio is low (assuming your only debt is rent payments). Sounds like house hacking would be the best place to start if you are wanting to get into investing and need a small down payment.

    0Reply
  • Chris Lopez
    OP
    Member since 2023 · 6 posts · 0 votes
    3y
    Quote from @Account Closed:

    Welcome to BP. As stated, you are confusing private lending with seller financing. I find it hard to believe you wouldn't qualify for a conventional loan based on your stated credit score and income, which can require as low as a 3% down payment. Student loans are not counted as debt when qualifying, so your DTI ratio is low (assuming your only debt is rent payments). Sounds like house hacking would be the best place to start if you are wanting to get into investing and need a small down payment.


     Hey Dominick,

    The problem is I live in California and that’s where I’ve begun my search. I’ve considered outside of the state but struggle with the down payment being so high, considering I wouldn’t move from CA. If I get a duplex for 100k, down payment is 25k. Not like I can’t save that but there’s closing cost as well. 

    What really draws my attention is seller financing! 

    0Reply
  • Chris Lopez
    OP
    Member since 2023 · 6 posts · 0 votes
    3y
    Quote from @Joe Villeneuve:

    First, you need to correctly define what "seller financing" is.  What you described is a "private loan", not seller financing.  The definition of SF is pretty simple.  SF is where you don't go through conventional means (bank, etc...) to get the money to buy the property, and instead of using cash (as actual cash or from a loan) and pay 100% of the cost of that property up front, you buy pieces of the equity in that property over time from the seller, and thus bypass the need for cash...and/or a loan upfront.


     Thanks for the reply Joe!
    So I can ask someone selling a house if I can pay them monthly payments for their home? 

    Let me give you an example:

    A quadplex is selling for 1.5 million and bringing in 2k per each unit per month in a 3-3.5k neighborhood. The reason why monthly rent is so low is because there’s a rent cap only allowing a 5% increase in rent each year. This makes it hard for buyers to get approved based off the self sufficiency rule. So, the seller is finding a hard time finding a buyer. Now what I getting from all this is, I can reach out to the seller and offer to buy the property on seller financing. I could offer my 15k down, a payment every month of 4K, and 10% of the rent. This would leave me with money in my pocket every month and give me the advantage of confront the interest rate. 

    Does that sound right or am I missing something?

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    3y
    Quote from @Chris Lopez:
    Quote from @Joe Villeneuve:

    First, you need to correctly define what "seller financing" is.  What you described is a "private loan", not seller financing.  The definition of SF is pretty simple.  SF is where you don't go through conventional means (bank, etc...) to get the money to buy the property, and instead of using cash (as actual cash or from a loan) and pay 100% of the cost of that property up front, you buy pieces of the equity in that property over time from the seller, and thus bypass the need for cash...and/or a loan upfront.


     Thanks for the reply Joe!
    So I can ask someone selling a house if I can pay them monthly payments for their home? 

    Let me give you an example:

    A quadplex is selling for 1.5 million and bringing in 2k per each unit per month in a 3-3.5k neighborhood. The reason why monthly rent is so low is because there’s a rent cap only allowing a 5% increase in rent each year. This makes it hard for buyers to get approved based off the self sufficiency rule. So, the seller is finding a hard time finding a buyer. Now what I getting from all this is, I can reach out to the seller and offer to buy the property on seller financing. I could offer my 15k down, a payment every month of 4K, and 10% of the rent. This would leave me with money in my pocket every month and give me the advantage of confront the interest rate. 

    Does that sound right or am I missing something?

    You're missing what the seller's monthly expenses are.  What's the seller's taxes, insurance and mortgage payment?
    0Reply
  • Nolan M.
    Rental Property Investor · Mesa, AZ · Member since 2015 · 143 posts · 187 votes
    3y

    @Chris Lopez I’ve done 3 seller financed deals, the most recent being 4 years ago. They are all in a small town where houses are cheap. Since the prices are so low, buyers need to come with cash, or the seller must be willing to finance. The reason for this is because banks won’t finance properties worth less than around 70k. My advice is to look in a small town within a couple hours of where you live, likely you’ll find cheap properties that will cash flow. You’ll have to deal with older homes, and the headaches they can bring, but it’s worked out nicely for me.

    0Reply
  • Chris Lopez
    OP
    Member since 2023 · 6 posts · 0 votes
    3y
    Quote from @Joe Villeneuve:
    Quote from @Chris Lopez:
    Quote from @Joe Villeneuve:

    First, you need to correctly define what "seller financing" is.  What you described is a "private loan", not seller financing.  The definition of SF is pretty simple.  SF is where you don't go through conventional means (bank, etc...) to get the money to buy the property, and instead of using cash (as actual cash or from a loan) and pay 100% of the cost of that property up front, you buy pieces of the equity in that property over time from the seller, and thus bypass the need for cash...and/or a loan upfront.


     Thanks for the reply Joe!
    So I can ask someone selling a house if I can pay them monthly payments for their home? 

    Let me give you an example:

    A quadplex is selling for 1.5 million and bringing in 2k per each unit per month in a 3-3.5k neighborhood. The reason why monthly rent is so low is because there’s a rent cap only allowing a 5% increase in rent each year. This makes it hard for buyers to get approved based off the self sufficiency rule. So, the seller is finding a hard time finding a buyer. Now what I getting from all this is, I can reach out to the seller and offer to buy the property on seller financing. I could offer my 15k down, a payment every month of 4K, and 10% of the rent. This would leave me with money in my pocket every month and give me the advantage of confront the interest rate. 

    Does that sound right or am I missing something?

    You're missing what the seller's monthly expenses are.  What's the seller's taxes, insurance and mortgage payment?

     Hey Joe,

    I’m not sure about that information. Seller financing really only works if the property is paid off, correct?  How does that all play into this deal?

    0Reply
  • Chris Lopez
    OP
    Member since 2023 · 6 posts · 0 votes
    3y
    Quote from @Nolan M.:

    @Chris Lopez I’ve done 3 seller financed deals, the most recent being 4 years ago. They are all in a small town where houses are cheap. Since the prices are so low, buyers need to come with cash, or the seller must be willing to finance. The reason for this is because banks won’t finance properties worth less than around 70k. My advice is to look in a small town within a couple hours of where you live, likely you’ll find cheap properties that will cash flow. You’ll have to deal with older homes, and the headaches they can bring, but it’s worked out nicely for me.


     Hi Nolan,

    I’ve been doing just that. I’ve been looking out of state as well. The thing that gets me about looking for a cheaper investment property is that I’d be forfeiting all the first time buyer programs for a small investment. Living in CA, those are the things I’d need to make a deal happen here. But like I said, I’ve expanded my reach to desert and woodsy areas to see if there’s anything!

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    3y
    Quote from @Chris Lopez:
    Quote from @Joe Villeneuve:
    Quote from @Chris Lopez:
    Quote from @Joe Villeneuve:

    First, you need to correctly define what "seller financing" is.  What you described is a "private loan", not seller financing.  The definition of SF is pretty simple.  SF is where you don't go through conventional means (bank, etc...) to get the money to buy the property, and instead of using cash (as actual cash or from a loan) and pay 100% of the cost of that property up front, you buy pieces of the equity in that property over time from the seller, and thus bypass the need for cash...and/or a loan upfront.


     Thanks for the reply Joe!
    So I can ask someone selling a house if I can pay them monthly payments for their home? 

    Let me give you an example:

    A quadplex is selling for 1.5 million and bringing in 2k per each unit per month in a 3-3.5k neighborhood. The reason why monthly rent is so low is because there’s a rent cap only allowing a 5% increase in rent each year. This makes it hard for buyers to get approved based off the self sufficiency rule. So, the seller is finding a hard time finding a buyer. Now what I getting from all this is, I can reach out to the seller and offer to buy the property on seller financing. I could offer my 15k down, a payment every month of 4K, and 10% of the rent. This would leave me with money in my pocket every month and give me the advantage of confront the interest rate. 

    Does that sound right or am I missing something?

    You're missing what the seller's monthly expenses are.  What's the seller's taxes, insurance and mortgage payment?

     Hey Joe,

    I’m not sure about that information. Seller financing really only works if the property is paid off, correct?  How does that all play into this deal?

    No, seller financing works best because you don't have to pay off the seller if the seller has 100% equity...which is the only time it works.
    0Reply
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