How do I buy my 2nd property??

Question

So I just closed on a small TRI plex and was able to get that property with an FHA loan. I have about 24k for a down payment on another property, but was wondering how people go about getting a second loan right after purchasing a property?? I paid off a lot of debt recently and my credit is 700ish. I have a W2 job that I've worked at for 20+ years. Will a bank want to see my 2 rentals make money, before lending me money? Any advice is appreciated.

Allan Smith · Answer

A commercial bank can use signed lease as income. Talk to a couple and see what you qualify for. Also, there are MANY ways to finance real estate so read up on it. Doesn't have to be 20% down payment every time.

Michael H. · Answer

The problem I had when I was in a very similar situation to yours was that the lenders wouldn't count the income from the rental properties because either I didn't have the income on my taxes and/or I hadn't had the property for a year. But they still counted the debt against me. This made my DTI pretty bad on paper. You can get around this problem with a DSCR loan, but then you're looking at around 7% interest, but probably only 20% down (instead of 25%). Like another commenter said, I would wait a bit to get to know your property. On the flip side, if a killer deal comes along, I'd do everything in my power to make it happen one way or another.

Scott Kaczmarek · Answer

@Benita Matheson - I’ll echo those that said that it’s okay to take a breath between properties! Like the others on here, I built my portfolio over a period of years and I don’t regret my approach. First, slow and steady allowed me to get my arms around each property and make sure it performed as expected. The banks like to see this too! Second, it allowed me to not only save up for the next down payment but I also made sure my reserve account was fully funded too. One of the biggest REI dream killers is an unexpected expense (vacancy, repair or both) that wipes out your available cash. I don’t think reserves are something that get enough attention on the BP forums. Finally, my portfolio would look very different (not in a good way) if I had the means or pushed to buy everything in a short period. The houses I buy now are a better class of property than my first couple. I just found my sweet spot but it took awhile and some experience to find out what I really wanted.BTW, I love you can add another unit to an existing property as your near term play. Always maximize what you have first! Then go buy your next one as a house hack next year. My best to you.

Eric Gerakos · Answer

While it's important to have financial goals, make sure you take your time and buy the right properties. Always remember the goal isn't to see how many properties you can own before you go bankrupt. The goal is to buy wisely so that every property makes money.

John Alosio · Answer

@Benita Matheson Congratulations on taking your first step! I'd recommend using the house-hack as many times as you can. Take advantage of the primary residence low(er) interest rate. That rate will never change unless you move out and refi. You could wait 12 months + 1 day. Buy another 2-4 unit Multi Family property with 5% down Conventional loan as a primary residence. The only caveat will be that the lender will most likely want you to justify your intent to live there. I.E. More living space, closer to work, +garage etc. Typically lenders will not view your rental income as actual income until you can show it claimed on 2 years tax filing. As long as your W-2 can support the new debt without rent factored in, should be all good to go.It sounds like you're in a rush to make moves. My recommendation would be: take some time to get to know this property first. See if there is any value you can add. Stabilize the property by making some improvements. Make sure everything is running smooth while you are living there. When you Do move out, there should be less urgent maintenance issues (or fewer surprises). Then, when you're comfortable that the plane is up to cruising altitude, move on and set it to autopilot.Now is the time to build a solid foundation for your business. Don't stretch yourself out too thin, too fast. Good luck!

John Alosio · Answer

@Benita Matheson There really is no right or wrong way go about it. No one size fits all. It all comes down to your personal situation and preferred level of Risk Aversion. I'll share my personal journey so you can compare my story to others'I just closed on my 3rd property in 4 years (1 purchase every 2 years). It blows my mind that I "control" almost a million dollars worth of real estate!(not equity, rather FMV of everything combined). My W-2 salary is below the "median area income" but that's not holding me back from an upward trajectory. Delay gratification, Bob n Weave. Here's my snowball: 2018- Purchased a duplex house hack with FHA financing. Added value through some moderate remodeling and updating. Tenant was paying mortgage. I paid myself "rent" in the form of sweaty equity value-add projects. 2019- Refinanced into a conventional loan. Appraisal came back with 30% equity (no more PMI/MIP!!!) 2020 - Purchased my second duplex house hack with FHA financing. Live-in-rahabbed the unit that needed the most attention. I plan to sell within the next 5 years to avoid paying cap gains on the half that i lived in. Looking to flip it up into a Quad-plex 2021 - Took out a HELOC on my first property to have funds available when needed for REI. 2022 - Earlier this month I Closed on my Primary SFH at 5% conventional loan. I promised my wife a legit "starter home". We reached the end of our comfortability for living in a construction zone & sharing walls. It was time to level up! Hope this gives you some ideas for your next move. Best of luck!

Benita Matheson · Answer

@Darius Nunez. Thank you. I'll let you know if I have any questions.

Benita Matheson · Answer

@Malcomb Stapel thank you! I really appreciate the advice

John Alosio · Answer

@Benita Matheson Bingo! You got this. :D

Benita Matheson · Answer

@John Alosio. Thank you for sharing your story. It is truly inspiring and gives me the confidence that I can do this! This triplex has one more unit that can be finished to make a fourth, so I am thinking that should be my focus for now.