How to get financing for second property?

Question

I currently live in a single family house that I am house hacking with my wife. We bought it with a low down payment conventional mortgage. After being in it for nearly a year, we would like to purchase another property and do something similar there. We don’t have enough funds to do 25% down on the next property (which we were told we would need by the lender). I haven’t yet talked to another lender in the area, but I wanted to see if you guys had any thoughts first. We would like to do another low down payment so we can keep our reserves for repairs. Would we need to try and refinance our current house to see if all our sweat equity there would get us up to 20-25% on that loan in order to go get another low down payment on the next property? What are your thought/strategies?

Thanks!

Joe Splitrock · Answer

In South Dakota and any state, you can get conventional financing for up to four units. Maybe your lender doesn't offer it, but most do.

Dakota Rice · Answer

@Jessica Wygal

Yes I sure do. I shopped lenders and found that pretty much ever other lender then the three I previously talked to could do another property low DP if my DTI could handle it. My wife graduated may of 2020 and started working as a nurse in July. We waited a few more months and ended up closing on another house hack property dec 2020. We did 5% down and our first property pays for both mortgages and the utilities. I’m currently renovating the basement our new property to be able to rent it out and start saving up for the next property.

Andrew Adam · Answer

I would move into the next rental which would allow you to do another lower down payment 3-5%. Once you are in a property for a year you could move into the next one. If you did that for 10 years you could have up to 10 fourplexes or SFR that you got for low down payments.

Jaysen Medhurst · Answer

The traveling nurse market is a great idea, @Dakota Rice. Glad it's working out for you.

The commercial loan thing sounds dubious to me. I see this company based in Sioux Falls offers FHA on 3- and 4-unit properties. That obviously isn't a commercial mortgage.

Justin Thiesse · Answer

@Jaysen Medhurst. I have sold 3 4plexes in SD in the last year and they all were able to get conventional financing and long as they lived in it. With very little money down.

Jessica Wygal · Answer

@Dakota Rice any update on this?

Dakota Rice · Answer

Thanks for all the great tips guys, I'm really learning a lot here. Before getting our last mortgage I checked with a community bank, a credit union, and a mortgage lender to see about getting conventional financing for up to a 4 unit. All three told me we would have to do a commercial loan with a larger down payment for anything over a duplex. I already reached out to another mortgage lender on financing this second property and was told he could get it done for us, especially since we already have  a lease in place for our current residence. If that doesn't pan out I'll check elsewhere until I find a way to get property #2 funded.

Ondrej Brown · Answer

Great question ! I'm curious myself

Jonathan Harms · Answer

Think about investing in a mobile home. You may be able to find one for sale at the same cash level you might need for a down payment on a SFH (likely less). I too rent to traveling nurses with some of my units in Rapid City and know that this market is willing to live in a mobile as long as it is safe and clean. The model then becomes, use your cash to buy the mobile, recoup in a few years, and then it becomes a big earner. The cash flow in the mean time eases the pressure on your reserve because you know how quickly you can replenish it. It will test your property management skills though, but since you are a professional real estate agent, that will help you cut your teeth and earn some respect in a market that is overloaded with agents. Send me a dm if you wanna grab lunch. Good Luck!

Dakota Rice · Answer

@Jaysen Medhurst thanks for the reply.

My current house was bought in poor condition in b- area of town. We paid 165k and put around 13k in improvements into it. We rent out the basement to traveling nurses for 1000 a month which nearly covers our mortgage. If we move and rent the top we will cash flow around 700 on the property.

In SD you have to have a commercial loan on anything above two units, and due to the lack of 30% down we chose to go the route we went with the SFR. We would like to repeat the process one more time and then possibly look at refinancing in another year to pull money out for a down payment on a 5-8 unit. My DTI ratio is below 40%, and we have been living/rehabbing on just my salary while my wife finished nursing school. Starting next month we will have her salary to help qualify for another loan. I just don’t want to have to wait 6+ months of stashing away her salary for a down. I’d rather purchase another project and live-in/fix/rent out during that time.

How to get financing for second property?

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