100% Financing with a Credit Union: 15 years: First Investment

[Astrid Cuas]

Hello BP. My name is Astrid. Buy and Hold Investor in Greensboro, NC. Taking the first step: 

After finding BP and lurking around the site for a few weeks, listening to the podcast (BEST PODCAST EVER) and reading "The Ultimate Beginners Guide" I picked a niche. My dream was to be a big time flipper, but now my goal is to house-hack a small multi-family for 70K. My biggest concern, and I am sure most can relate, has been financing. BP motivated me to finally take the first step; look at properties and see what is out there. I know I do not have enough money for a down payment/closing cost and reno now, but figured by the time I found a good property and assembled my team I could have enough saved up (6-8 months). I contacted a credit union that I used in the past. This credit union does not offer FHA loans, but they did offer and approved me for 100% financing for 15 years at 5%. I was not expecting that. THIS CHANGES EVERYTHING.

Cons:
15 year amortizations means higher monthly payment; less cashflow
Does not come with a renovation loan. Rehab cost down the line would come from the money that I save for my initial down payment and closing cost

Pros:

I can ask for the closing cost to be rolled into the mortgage, as well.
$300/400 appraisal/inspection cost out of pocket and I own a multi-family.
No PMI

I called another bank for an FHA loan and for some reason a multifamily will require 15% down.

After reading about seasoned investors using hard money lenders and working really hard to find partners who will take 7%, this credit union loan sounds GREAT. But does anyone believe that I can do better as a first time home buyer; we’re all about finding the best deals, right? Should I keep calling around? If I tell other banks about the credit union loan will they try to offer me something better? Does it even work that way?

I am not military; my property will mostly not qualify for a USDA loan. I could live in the property, but I want the flexibility to move out after the repairs are done.

I have not read “The Book on Investing in Real Estate with No (and Low) Money Down yet. I will pick it up after I finishing the “Ultimate Beginners Guide”

Thanks in advance for any feedback. Glad to be a part of this community. 

[Paul Jamgotch]

@Astrid Cuas This is how I see it: Let's say your gross rents are $1200/mo, your payment on $72,500 is $573, and you put $14,000 into rehab.

1200 x .5 = 600 net income (taxes, repairs, occupancy, etc)

Payment on $72500 for 15 years at 5% is $573/mo

You end up with only $27/mo. However, over the next five years you will pay off an average of $308/mo. So, your return is $335/mo, or $4,020/year.  $4,020/$14,000= 29% annual return.

The best money managers in the world struggle to consistently return 11% for their investors without taking large risks. This is the edge you have as an individual investing for yourself.

Each additional year you pay about $240 more goes towards your payoff (and increases your net return by that amount). This increases your return by about 1.6% a year. After 15 years and loan is paid off, assuming no rent changes, your annual return on the $14,000 is about 51%. History tells us rent will be higher.

If property appreciates your return is even more, but most don't make that assumption when evaluating an investment.

If property goes down in value your return is less but it's tough to project this as well.

If you don't want to tie up your cash for a few years or you can reasonably expect a better return than 28% on your $14K then pass on this deal. And as others have said, you can easily refi into a 25-30 year to get cash out, assuming you have the equity needed after repairs. Personally I would not make my decision based on this... stuff happens.

Good luck! Please keep the board posted.