Real Estate Broker · Aurora, IL · Member since 2015 · 8 posts · 2 votes
Rookie in Aurora, IL (Chicago suburb) looking for my first SFH or multi-family home to buy and hold. The issue that I am running into is that I have enough funds to put down the 20% for a conventional mortgage but it will pretty much leave me with limited funds to do any repairs, or just have emergency money in general for emergencies.
I have been hesitant to buy my first investment property due to this. How do people do it? Should I just take the risk and hope my analysis and all the due diligence will pay off, or do I look for a private lender or even possibly a HML?
Unfortunately I already have a primary home, so I can't do an FHA, live in it for a year and then rent it out.
Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
10y
Or, chiming in on the post above mine, even if someone won't finance the entire thing, they may be willing to carry back a second mortgage of 10%. I like to get a lump sum of money plus a stream of money when selling. That can get you into a property for the 10% and then use your own funds to improve.
I've bought a number of rehabs, haven't yet used hard money, but have used cards. When I was doing a number of rehabs, we'd have a Mohawk carpet card, and get the same flooring in each house. And a Home Depot card for certain items, and a Lowe's card for the maple cabinets I liked, etc. I was young and didn't have high balances available, but it worked to get the repairs done until we could turn the house. When we were doing more fixers (3 a month), we used Wells Fargo and Countrywide with their slow approval process, and high closing costs. We'd buy a house, fix it in a couple of weeks and sell in three months or so. I have realized that the quick money of HMLs enables folks to do more deals, at similar costs. Sometimes it is better to pay more for the short term use of money. :D
Investor · Aurora, IL · Member since 2015 · 29 posts · 14 votes
10y
Find a private investor. I've done deals before where I'll loan amount money for rehab (or even closing costs, whatever's needed) for either a straight $ return or a cut of the profits of its a flip. Get creative! I'm in Aurora too (and a realtor and flipper) so I'm familiar with what you're working with.
Investor · Cary, IL · Member since 2014 · 124 posts · 95 votes
10y
Do you have an FHA loan on your primary residence? The only reason you wouldn't be able to use FHA financing is if you already have an FHA loan on your primary or any other residence you own.
In the event that you already have an FHA loan and want to use conventional financing, they will typically require a 25% down payment along with 6 months worth of seasoned funds to cover PITI (principal, interest, taxes, and insurance). This may seem like overkill, but it's fairly prudent to have from a risk perspective. Especially if the building has more units and there's a chance of having multiple vacancies at one time.
I'm not sure what you mean by "take the risk and hope my analysis and all the due diligence will pay off", but I wouldn't make a move unless you've done enough homework to make a very educated move where hope is a less pivotal factor. Not to mention, you may be able to acquire the property using creative methods with little left for reserves, but what happens if you have a major repair you didn't account for right off the bat with no way of covering that expense? That being said, you could always find an experienced partner who has the reserves/repair money you need and split the deal to learn the ropes...
Real Estate Broker · Aurora, IL · Member since 2015 · 8 posts · 2 votes
10y
@Elyse Moore I appreciate the feedback. I will shoot you a PM and see if we can get together and chat a bit more and get some of your input and ideas. I need to network a little more with seasoned investors with more experience.
@Michael R. The current home I live in is under my wife's name, I am only on the title. I have no mortgages under my name as of yet, so yes, I would be able to get an FHA loan, but it would be sketchy if I am not living in the home as my primary residence. Please correct me if I am wrong by all means if that is not the case. I am looking to purchase my first investment property without having to put everything i have in it just to buy it and then have no reserves for repairs like you mentioned.
My ideal situation would be a SFH to get started and work my way to a multi-unit. I completely get what you are saying about getting an experienced partner. I appreciate the information and feedback.
Investor · Cary, IL · Member since 2014 · 124 posts · 95 votes
10y
Yes you're correct, the home would have to be owner occupied for a year and, if it was in need of repairs to the point where it's a deal it wouldn't meet FHA's requirements. I'm with you on the fact that i couldn't claim owner occupancy and not live there.
One method I didn't mention, and oddly enough is the way I purchased my most recent SFR is using owner financing. You'd be amazed how many people own a home they've either inherited or gotten themselves into a pinch and are motivated to sell with negotiable terms. You get a house you can fix up and rent out while they get rid of a headache and earn some interest on their money. You could even bump up the interest rate in return for a no-money-down closing.
Your next question is probably "where do i find these people?" Try driving for dollars or using some of the money you have on direct mail.
Just some suggestions, i hope this helps, and sorry for the confusion.
Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
10y
Or, chiming in on the post above mine, even if someone won't finance the entire thing, they may be willing to carry back a second mortgage of 10%. I like to get a lump sum of money plus a stream of money when selling. That can get you into a property for the 10% and then use your own funds to improve.
I've bought a number of rehabs, haven't yet used hard money, but have used cards. When I was doing a number of rehabs, we'd have a Mohawk carpet card, and get the same flooring in each house. And a Home Depot card for certain items, and a Lowe's card for the maple cabinets I liked, etc. I was young and didn't have high balances available, but it worked to get the repairs done until we could turn the house. When we were doing more fixers (3 a month), we used Wells Fargo and Countrywide with their slow approval process, and high closing costs. We'd buy a house, fix it in a couple of weeks and sell in three months or so. I have realized that the quick money of HMLs enables folks to do more deals, at similar costs. Sometimes it is better to pay more for the short term use of money. :D
Investor · Jacksonville, FL · Member since 2014 · 186 posts · 34 votes
10y
Assuming the property you are buying will have only limited repairs, AND it will cashflow pretty well after you get it rented, AND you are living pretty well w/in your means consider the following.
Personal loan from friends/family - offer a reasonable interest rate on a non-amortizing loan to borrow half the down payment. If things go well, you won't have to tap what you have left in reserve, and it won't cost you that much in the meantime. If things go really badly at least you had the reserve, and between what you pull in from normal work and hopefully what the property will generate you should be able to repay the F&F loan w/in a few months to a few years.
Lender · Roseville, CA · Member since 2011 · 205 posts · 86 votes
10y
@Alex Ascencio - If you have 20% down, FNMA Homestyle loan may be a good option for you to purchase and make repairs on a fixer for a buy and hold or a flip. The loan is based on ARV (after repair value) so you have an escrow hold back for improvements instead of using cash. Unlike FHA 203k, you can be an investor as long as you have 20% downpayment. For a secondary or primary residence, the LTV (loan to value) can be higher. Be sure to work with a lender who has experience with these as it is a bit more complex to put together than conventional financing.
How do people do it? Should I just take the risk and hope my analysis and all the due diligence will pay off, or do I look for a private lender or even possibly a HML?
If your credit is decent then the strategy for you is to find a property you can purchase @ a deep discount using either a private or hard money loan. The 20% you have for a downpayment can be used to cover the gap between the loan & what you really need. Renovate the property, Rent it out then refinance taking your money out of the property. It's called BRRR.