Loan options for Rentals with less than 20%???

Question

I’m currently the proud and brand new owner of a duplex in Northwest Indiana and looking to expand my net worth and passive income stream.

There are several decent deals in my area for duplex, tri and quad-plex properties that if I could only figure out how to finance then they would cashflow immediately. That said I don’t have a ton of capital to put down.

As a new investor, I’m looking for ways to be creative in financing some multi-unit deals. Can anyone please share some advice and/or guidance on this topic or share links to ideas that may make some sense for someone with too little capital?

Adrien C. · Answer

Congrats on buying the duplex and getting started. But slow your roll. Too many people grow too fast rolling all their money into the next down payment. Most investors have no emergency fund and covid should have taught us nothing is certain anymore. I'd make sure you have at least $8-10K per door for emergencies especially if you're leveraged. I know investors locally who haven't collected rent since March but still have to pay the mortgage. Furnace or roof replacement- big bucks. Once you get to a decent emergency fund (my comfort zone for all my properties is $30K which I don't touch), then you can roll it all into more down payments. RE is a slow and steady game.

Scott Swanson · Answer

Alec,

We do business in Northwest Indiana as well. One way to buy without a loan, is to do seller financing. When we lock up properties for our investors, we always ask the seller if they're willing to finance the deal. If they say yes, we move forward, if it's a good deal. Here's an example of how it might work for a duplex. These numbers are just an example:   Purchase price = $85k. Down payment = $15k. Payment to seller each month = $600. That amount goes to the principle. You pay taxes and insurance = $110. Rent = $1400 a month. Property management = $140 a month. So your total out of pocket costs per month are $850. Take another $140 a month and just put it "aside" for maintenance and vacancy. But you don't pay that, you just "save" it. So your payments are $850 and then $140 for vacancy, for a total of $990. You're bringing in $1400, so your profit each month is $410. So let's say you take out the loan for 5 years. At the end of 5 years, you would owe the seller $34k. I don't want to complicate it, but if you saved the net cash flow every month, plus an additional $140, you'd have enough money to pay off the loan at the end of the 5 years. Your second exit strategy would be that you can refi the property. If you refi at say $65k and saved the money each month to pay off the loan on the first property, you now have an additional $65k to put down on other properties. If you can find a few properties for say....$15k down, you can now afford to buy 3 more properties, on seller finance deals. This is how you build wealth and expand your portfolio.  It's a no brainer! It's called the BRRRRR method. The issue becomes finding sellers that are willing to do this, plus these type of deals go very quickly. I hope this helps and I hope I didn't complicate it!