Negotiating Advice for Newbies

[Evan M.]

Wondering if someone can give some newbies advice. We are looking at making our first purchase of a single-family home rental property out of state. The particular home is $200 K and we could supply 20% down. We just both quit our full-time jobs to run a business we started in 2020. The private investor we’re working with understands this predicament and that we couldn’t get traditional funding via mortgage or heloc through a traditional bank due to being newly self-employed with a young business, despite our excellent credit. He suggested that if we brought him a deal, he would bankroll it for us and then we could refinance him out of the deal in two years. He suggested that the two years of rental payments plus the continued success of our business would be enough for mortgage lenders to consider lending to us in the future. Our goal is to grow our buy-and-hold portfolio. We’ve grown close to this individual and feel that he’s giving us a good deal at 6% with 20% down. However he’s asking us for more details about the terms we are looking for. Of course when we’ve been running the BiggerPockets calculator we’ve been entering 30 year terms. But this particular investor is used to lendering for short term fix and flip investing at 12%. Conservatively, this deal would break even/cash flow $150 at 30 years. If we were to suggest a 15 year term, it would be a negative $300 cash flow situation (including variable expenses in the equation). And obviously if we did a shorter term it would be even deeper negative cash flow. In this situation, should we just be happy with a negative cash flow situation in order to get our feet wet? Is there any way an investor like this would be willing to do a 30 year term when the plan is to refinance them out in two years? This is our first time negotiating any deal so we’re just trying to figure out what the hell to do to make it a win-win. Any other creative solutions in this scenario? TIA 

[Tori Applegate]

Quote from @Evan M.:

Wondering if someone can give some newbies advice. We are looking at making our first purchase of a single-family home rental property out of state. The particular home is $200 K and we could supply 20% down. We just both quit our full-time jobs to run a business we started in 2020. The private investor we’re working with understands this predicament and that we couldn’t get traditional funding via mortgage or heloc through a traditional bank due to being newly self-employed with a young business, despite our excellent credit. He suggested that if we brought him a deal, he would bankroll it for us and then we could refinance him out of the deal in two years. He suggested that the two years of rental payments plus the continued success of our business would be enough for mortgage lenders to consider lending to us in the future. Our goal is to grow our buy-and-hold portfolio. We’ve grown close to this individual and feel that he’s giving us a good deal at 6% with 20% down. However he’s asking us for more details about the terms we are looking for. Of course when we’ve been running the BiggerPockets calculator we’ve been entering 30 year terms. But this particular investor is used to lendering for short term fix and flip investing at 12%. Conservatively, this deal would break even/cash flow $150 at 30 years. If we were to suggest a 15 year term, it would be a negative $300 cash flow situation (including variable expenses in the equation). And obviously if we did a shorter term it would be even deeper negative cash flow. In this situation, should we just be happy with a negative cash flow situation in order to get our feet wet? Is there any way an investor like this would be willing to do a 30 year term when the plan is to refinance them out in two years? This is our first time negotiating any deal so we’re just trying to figure out what the hell to do to make it a win-win. Any other creative solutions in this scenario? TIA 

Have you looked at other financing? There’s tons of private money out there where you don’t need a job or any income verification to qualify. Maybe look into dscr loans. Angel Oak is one that uses the fact that you own a home and the rent is at least 1:1 with the rental mortgage payment. I would research further! I’ve been down the Google rabbit hole the past few days looking for the least amount down for hard or private money loans and I have found many other useful things. Don’t be afraid to call. I’ve talked to the Angel Oak people before and definitely decided I would look into them again later.