Financing scenarios (Piggyback, conventional fixed, refi)

[Julie Coleman]

My husband and I are looking for our first house hack multifamily in Pasadena, California. Pasadena is a City suburb directly adjacent to the City of Los Angeles. After discussing lending options with our broker, we would like your advice! Here is a list of financing scenarios we like to get you take on. For simplicity, the scenarios below will be based on a $600,000 duplex where we intend to renovate the two units while we live in one unit. After one of the units is renovated cosmetically, we intend to rent the second unit to a tenant while living and flipping the other unit. After we live there for the minimum time allotment required by an owner-occupied loan (1 year?) we will vacate and rent out both units. We intend to cash flow the property for 3-10 years to allow for any cycle dips in property prices. Available funds for down payment & renovation are $80-100k. Both of our credit scores are above 760 and we are preapproved with underwriting. Financing Scenarios 1) Apply for two mortgages (piggyback loan). First loan is a conventional 30y-fixed rate at 80% LTV ($480,000) to avoid private mortgage insurance. Then take a second mortgage with a higher interest rate we can pay off with the tenant cash flow after one year. Either refi into one mortgage or pay off smaller, higher interest loan first. Pros? Cons? 2)FHA loan at 85% LTV. (15% downpayment) Little money for renovations. Must refi to get out of PMI but since we’re First time home buyers it’s worth looking at. Pros? Cons? 3) Conventional loan at 90% LTV (10% downpayment). Must pay PMI. Use left over 40k funds to renovate units. After renovation (less than 6 months), apply for revaluation of appraisal. If property appreciates beyond 20% equity, then PMI is removed. Put extra cash flow from property into mortgage payments to meet 20% to make sure revaluation satisfies. Any advice helps. Thanks!

[Boris Gutierrez]

Hey Julie, typically investment property will be financed via conventional loans.  Option 3 sounds interesting and risky but the one I would consider to reduce outlay of cash.  Assuming the your after repair value analysis is spot on.

The harder part may be in finding the property.   I just ran a search for duplex units in Pasadena and there is nothing active for sale under 800K.  There are two properties that were on sale for 534K and 600K but were pulled from the market (status K).  Listing agreement was cancelled for whatever reason.

Are you set on Pasadena and a duplex?  Open to any other areas?

If you want, I can set you up on an auto search for active and new duplex properties that come on the market in LA county.  Just message me your email address.

Boris