How to Estimate Financing Details When Analyzing a Deal

Question

Hi all. I am new to this community and REI, so please be patient with my very beginner question :)

I am just starting to learn about analyzing deals and am not sure how to estimate my financing details when doing so, mainly length of loan and interest rate. How am I supposed to know what terms a lender will offer me? Do I need to secure a lender before analyzing deals? I'm also wondering if I should be looking at portfolio loans now or stick with conventional until I max out.

Context: I am looking to do my first deal in Pittsburgh in the coming months. I'll have about $40k cash to put into it. I would prefer a turnkey vs a rehab since I'll be investing remotely. My credit score is just over the "excellent" threshold and I currently own one property which is the house I live in.

Thanks all, I would really appreciate any insight!

Jim K. · Answer

@Sarah SzuhayTalk to @Alex Deacon and the group at DHRE. Whatever you do, don't go blind into Pittsburgh from OOS, don't go without highly credible third-party property management if you do decide to invest here. I have stated perhaps hundreds of times in these forums that this city is unusual, not what most people expect, broken up by geography and history to a greater degree than many others. Are there huge, sweet deals here? Yes. But really, mostly for local folks. Is there steady, moneymaking property here for OOS investors? Yes, as long as the investors don't expect miracles or a vastly greater return than elsewhere, as they are often led to believe. Can you BRRRR a string of houses here into a fortune starting from limited capital? It's very difficult due the nature and age and deferred maintenance on most of the properties you'll be looking at.

Do your homework, take the online course under the education tag, listen to many of the podcasts, read many of the blog posts and guides, buy recommended books and learn more, ask questions in the forums, get as much value out of the time you spend on BiggerPockets as you can. Good luck to you.

Sarah Szuhay · Answer

@Jeremy Taggart That is extremely helpful information. Seems like there are trade-offs between down payment, rate, and fees. I am hoping I can find a lender that will be able to help break down all these options for me. Great idea to ask for a cost sheet for a sample property. I am hoping to buy a multi-unit if I can find the right deal.

Michael Tyler · Answer

In addition to the turnkey horror stories, it’s also not the best way to grow wealth. I consider turnkey more a place to store wealth you earned elsewhere. It has none of the forced appreciation that lets you refi out and repeat the investment again (if you wanted to).

If I were you, not wanting to manage a rehab, I’d do this: Put 20k down on a 60-100k property. What you’re looking for is a place that’s shabby but only needs cosmetic work. Paint, flooring, etc. It’s the saddest house on the block. The rest of the houses are worth more than it because they’re prettier. Make your new property pretty like them. Now it’s worth what they’re worth, which equals more than the money you put into it.

Easier said than done but it’s a strategy. Since you don’t want to manage the rehab, find a property manager who will manage the contractors for you. You’ll pay a little extra for this service but the manager is in your court because they benefit from a house which rents well.

Or said another way, you could spend 40k on a turnkey house in exchange for 40k of equity. Alternatively you put 40k into a cosmetic fixer and you get more than 40k equity.

Sarah Szuhay · Answer

Thanks all for the wonderful insight and advice!

@Kenneth Garrett Thanks for the info. I am starting to think turnkey isn't the best place to start, but appreciate your recommendations. I'll need to do more research.

@Jim K. Great points on Pittsburgh, I know what you mean about the city being unusual. I actually grew up there and all my family lives there, so I won't be going in totally cold.  However, I haven't lived in Pgh in 10 years so will still have a lot to learn.

@Marco Santarelli Appreciate the advice, I have been weighing what type of neighborhood to invest in and it sounds like I should stay away from the rough ones for now.

@Michael Tyler Thanks for your insight. This makes total sense that I should rehab the property a bit so I have the option to refi and repeat. Even if it means I need to pay a property manager to project manage it like you mentioned, since I'll be remote. I just hope I can find deals that still cash flow well despite that extra cost!

Kenneth Garrett · Answer

@Sarah Szuhay

Turnkey is a typical purchase 20% down and a mortgage.  All the work is done.  Do your homework on turnkey.  Lots of horror stories on BP.  You can get pre-approved with a lender so you know what terns are available to you.  Your in a great position with funds and credit. Turnkey providers I have heard good things about are Norada Real Estate and Jason Hartman.  Not recommendations just info for you to do your due diligence.

Jeremy Taggart · Answer

@Sarah Szuhay terms and rates will vary whether you buy in your personal name or under an LLC. Personal name you can get a 30 year fixed. FNMA loans right now I just locked a 3.375% on a duplex for 30 years fixed versus portfolio was around 4.875% as a 10/1 ARM 30 year fixed with a local bank. I always have my lender send me cost sheets for a FNMA loan versus portfolio and decide at that point which to go with. Portfolio is going to have lower lender fees than the FNMA but typically will have a higher rate. Right now the rate difference was so big that I decided to pay the tad bit higher fees to lock in that low rate over 30 years. Whereas a place I bought last year I went portfolio since the rate was only slightly higher and fees were way lower. Really depends on the current rates/fees which is better. I'd say have a lender send you a cost sheet for both on a sample property that way you'll have a rough idea of what to use when running numbers. If you are purchasing under an LLC then it's commercial and typically hard to get a 30 year fixed so not quite as favorable cash flow wise.

Are you looking to buy a multi unit or single family? Single fam you can go as low as 15% down for FNMA whereas multi it's 25% down for FNMA and 20% down for Portolio.

Adam Blachnio · Answer

@Sarah Szuhay

If you're buying SFH, pls don't be so optimistic giving full year of occupancy. Investor will likely see how you can give him monthly payments if subject property is vacant for two month???

Jason Hartman · Answer

Thanks @Kenneth Garrett

Hi @Sarah Szuhay - We're happy to assist you in building a great portfolio!

Marco Santarelli · Answer

@Sarah Szuhay -- Yes, definitely stay away from "rough" ones. That would be what we call 'D' class neighborhoods, and possibly some C- areas too.

We grade neighborhoods from A+ thru D- and our clients stick mostly to B, B+, and A- areas because of the demographics and tenant class you find there. It's largely based on what you want or need as a real estate investor.

FYI -- I covered this in some detail and depth in one of my earlier episodes titled, "Choosing the Right Neighborhood" (episode PREI 007).

Hope that helps you out.

Continued success!

Michael Tyler · Answer

After reading Jim K’s reply I should add that he’s right, there is a lot of deferred maintenance in many houses. Same as anywhere but it’s a point worth making. You don’t have to know how to fix this stuff, just how to identify it from photos, what to request of your agent’s walkthroughs, and what matters in an inspection report.

People usually stick with conventional financing as long as possible before going to portfolio/commercial options. Mainly because it has way better rates and terms.

How to Estimate Financing Details When Analyzing a Deal

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