Financing Rental Properties with No Tenants In Place (Shortsale, Foreclosure)

[Sean H.]

I have a question about financing for rental properties that do not have tenants at the time of sale. These can be single family homes, duplexes, fourplexes, etc. Without tenants, you cannot qualify for a Investment Property Loan since you cannot count the income from potential tenants. This leaves you with two options:

1) Try to qualify solely on personal income

2) Pay all cash, then get a cash out refinance once you have tenants

The thing is that in my area (Southern California), investment property for SFH approaches $500,000+ in the most desirable areas, and duplexes/fourplexes are $700,000+. To qualify for a loan based on my own personal income would not be feasible, especially if one already have a personal residence. And to have $700,000 in cash to buy a property is lofty.

So my question is are there any alternatives in this scenario? The impetus for the question is that the good value deals that I see are all short sales/foreclosures where there are no tenants and thus cannot rely on rental income to qualify for a mortgage. While the deals are slim, they come from time to time but qualifying for the purchase is extremely difficult without having tenants in place. 

I've read articles of people touting FHA loans and only 3% down, however without tenants in place your personal income must qualify for the loan, and with prices around $700,000 most individuals would not qualify. While it's a great idea in other areas, it is tough to pull off in Southern California. I imagine most would recommend private money lending to satisfy this need, but I wanted to see if there are any other work arounds that may be available. 10% with 2 points is an alternative, but you would still have to carry that loan for the 3-5 months it would require to fill each unit in a fourplex, after repair costs. Adding that to the down payment required, it is not an easy 3% comparable to an FHA Loan.

Any advice is appreciated. I'm trying to advance into the smaller mutlifamily market after owning a few single families, however am finding it difficult with my market. Thanks again for any input!