Best option to finance a new investment property

[Allende Hernandez]

Good morning investors,

I'm looking to buy a property in the South FL area and need to bounce some ideas against you guys. 

The root need comes because I need to bring my mom closer to me and Im looking for a way to make this a positive financial decision as well. My idea is to purchase a property with a division (or the possibility of one) so I can place her in a small apartment 1/1 and rent the rest of the house to offset the Mtg as much as I can.

As things are today its been impossible to find something that covers it all, Im seeing that I would still have to come up with some cash every month.

I met with a lender yesterday and he presented to me an option for a 5% down loan. The good, less money up front, the bad: MIP and lower cash flow. On the other hand I have a HELOC on my primary that is interest only for a few more years that I could use as a baseline then mortgage the rest of it. This will help me with the cashfow but wont paydown the prop.

What you guys think? Any suggestions on how to structure the financing here to make it make financial sense?

Thank you in advance.

[Devin Peterson]

What is your ultimate goal? You can only buy 5% down if you intend to purchase as a primary residence. Other than that, you will have to use a debt service coverage ratio loan.

[Jaren Woeppel]

Hey, @Allende Hernandez

What a wonderful question and also a very worthwhile investment. 

What is you appetite and or ability to put a larger percent down? Is your main goal with this property cash flow while providing a home for your mother? I ask because of course there is the ability to put more money down to get more advantageous rates and also lower payments because your are borrowing less, but this will affect your cash on cash ROR. 

There are some pretty good products out there available for investments, where you can do seller paid temporary rate buydowns. For example, you could do a 3-2-1 temporary rate buydown where the rate is 3% lower first year, 2% lower in the second, 1% lower the third year and goes back to the original rate for the rest of the loan. The beauty with the seller paid is that the money goes into an escrow account and if you refi or sell during the buy down period, the left over funds go towards the principle, so it’s not lost like if you were to buy down the rate with points and then sold/refi in the next few years.

Hope that makes sense but let me know if there’s any other considerations or something I misunderstood and we can continue brainstorming!

[Raymond J. Rodrigues]

@Devin Peterson why would he only be limited to a debt service coverage loan if he could take out a conventional loan as an investment? 

[Luis Maqueira]

You are asking for a lot

To get a deal, with location and needs.

You need a good place to live for your Mom so she is close to supermarket restaurant may be park.

Find the best place for your Mom and yes work on the financing. 

Is not only how much you paid,  you need to pay right base on you resources.

Find a good realtor that knows the market.

good luck

Luis Maqueira MMP

[Allende Hernandez]

Quote from @Jaren Woeppel:

Hey, @Allende Hernandez

What a wonderful question and also a very worthwhile investment. 

What is you appetite and or ability to put a larger percent down? Is your main goal with this property cash flow while providing a home for your mother? I ask because of course there is the ability to put more money down to get more advantageous rates and also lower payments because your are borrowing less, but this will affect your cash on cash ROR. 

There are some pretty good products out there available for investments, where you can do seller paid temporary rate buydowns. For example, you could do a 3-2-1 temporary rate buydown where the rate is 3% lower first year, 2% lower in the second, 1% lower the third year and goes back to the original rate for the rest of the loan. The beauty with the seller paid is that the money goes into an escrow account and if you refi or sell during the buy down period, the left over funds go towards the principle, so it’s not lost like if you were to buy down the rate with points and then sold/refi in the next few years.

Hope that makes sense but let me know if there’s any other considerations or something I misunderstood and we can continue brainstorming!

Well, this is a necessity that I'm trying to turn into an opportunity. Therefore trying to get a bit creative with the financing.
Positive cash flow will almost be impossible (as I'll have to probably take one bed away, and then build a bath and a kitchen) in what I've been finding, so Im trying to offset the mortgage as much as possible.
Long term, ideally I get to keep it and the 2nd unit adds to the cash flow if I ever dont need it anymore. 
The loan program I was offered is the Family Opportunity Mortgage. 

[Jaren Woeppel]

The Family Opportunity Mortgage is an interesting program. Essentially the goal of the program is to allow a child to provide a place to live for their parent(s), whom would not be able to afford the home otherwise. The benefit being, both Fannie and Freddie recognize the program, and you will be able to price the loan as if it was a primary residence, not a second home or investment property. With that, your rate and terms are more favorable than with the secondary or investment loan product. 

My question surrounding cash flow; yes, probably using the 5% down product and paying PMI/MIP, it would be almost impossible to cashflow. However, if putting a larger down payment was an option, you could always price out the loan and see how large of a down payment is required to cash flow. I am not saying this the approach that should be used, just saying there are a few levers that can be adjusted depending on what your overall goal and financial situation is. Even if you were to put 20% and avoid the PMI/MIP, the Family Opportunity Mortgage program may still a beneficial program for you, because you would be getting rate and terms similar to a primary residency, not a second home/investment property.

Again, depending on your current situation and how much time/effort you want to put into this. There could be an option to use the BRRRR method and change it a little bit to fit your needs. Find a property and hopefully purchase for a good price in cash (or a similar result, hard-monty option), perform the required repairs for your mother and potentially get the second rental unit ready. You could then qualify the rent coming in and use a DSCR product to take your money back out. Depending on purchase price, cost of rehab, ARV, and rent in that area; you could potentially pull all or some of your money out of the property. This would be the "outside of the box" approach you may be looking for, but it is capital and time intensive. If done right, you should have forced a good chunk of equity in the property, and then you can refi at numbers that would also allow you to cash flow.

[Zach Wain]

Children buying a primary home for a parent is a great program. 5% down and renting 1 room out will obviously not cash flow well. If you like less down and staying more liquid, go for it! PMI is cheap if you have a great score, especially considering you are getting a primary mortgage rate and not a rental rate.

I love the program!

[Allende Hernandez]

Thank you both!!

Now, factoring in the interest only Heloc I have. That could cover aprox 40% of the purchase price. How do you see it playing out?

[Jaren Woeppel]

You’re welcome, Allende

As far as the HELOC goes, if I am understanding correctly, there a possibility for you to use a HELOC on your primary residence, to put a larger down payment on the investment home and avoid mortgage insurance and have positive cash flow from the property?

When you run the numbers, there could be a scenario, on paper, where this makes sense cash flow wise, because of the interest only nature of the HELOC you have. However, keep in mind that you are using your primary residence as collateral in this case. If the deal were to go bad or an unfavorable circumstance arose, you could not only be in jeopardy of losing the investment property, but also your primary residence. We hope the situation never happens of course, but it's a possibility. My personal investment philosophy would avoid leveraging my primary residence unless I had plenty of reserves to ensure I would be covered in that kind of situation. Of course, if you run the numbers and understand the additional risk, the HELOC may be the best route for you.