Financing an Investment Property WITHOUT Putting 20-25% Down

[Account Closed]

Hey BP, I'm looking for some advice 

I'm looking to purchase a property in a cheaper market a few hours away (I live and work in the Orange County, CA area, which tends to be a pricier market). 

Initially, when learning about financing options, I thought about going the FHA-route but I figured that won't work due to being a non-occupant. Further, I've been told that financing an investment properties typically requires a 20-25% down payment. Is there a way that anybody knows for me to attain a loan for an investment property without forking over 20-25% on a down payment? I'm trying to put as little money down as possible and leverage this property. For what it's worth, I make a good salary, have 790-800 FICO score, so I don't think qualifying should be much of an issue.

Thank you in advance!

[Jay Hinrichs]

YES you pay cash do some value add then refi and hopefully the new value raises up to allow a 70 or 75% cash out to get you all your money back so you have no money in the deal commonly referred to on BP as BRRRR

although BRRR is hardly a new concept that's how we did investor deals for years prior to the 08 crash.

if you don't have cash and have limited down payment.. and want to leverage up.. you may want to rethink the whole idea.. of buying one rental.. lots can go wrong and you would be under capitalized.

Fico while great does not equate to cash.. you need cash to be in the landlord game.

[Account Closed]

Jay Hinrichs

Thanks for the response, but the whole
idea is to NOT use much cash on this deal and just get a property under my belt. I also want to take advantage of tax benefits as soon as I can with a property while I continue to work my 9-5 and saving my income. Keep in mind also I’m not trying to get away with NO money down, but just not 20-25%. I can work with 5-10%.

[Jay Hinrichs]

you need a seller financed deal then.. banks are not playing ..

[Account Closed]

Jay Hinrichs Any experience or suggestions with credit unions?

[Chris Mason]

Do you have a friend or family member that'll lend you 10% or 20% down, and do you own real estate already?

[Dave Steadman]

All two on my investments were 15 percent. Try cornerstone home lending

[Frank Gucciardo]

My credit union wants 20-25% down and are only doing commercial loans.

No free ride, you’ll need cash, seller finance, or investors.

Also, what do mean when you say you want to take advantage of tax benefits?

[Account Closed]

@Chris Mason I can work with 10% but 25% is out of reach for now. I know within months I can save some money and get the 25% ready, but I'm eager to get started, get my hands dirty, and start learning already. 

I do not own real estate at the moment. This would be my very first purchase.

[Chris Mason]

Buy something to live in. I was touching base with a past client two weeks ago who did one of the low down payment options for owner occupants. Her PITI is $4500/mo. She told me that her "slice" was down to $500/mo after 18 months of ownership. She's rented every square foot possible out to people. She used to pay $2300/mo in rent, so her net effective positive cashflow assuming $500/mo in maintenance/capex/etc is $1300/mo on her first 'deal.'

You're not going to buy something out in the sticks as an investment, and cashflow it $1300/mo.

[Shiloh Lundahl]

@Account Closed lots of people use lines of credit and so forth in order to finance that 20 to 25%. Many people use HELOCs or personal loans from the bank etc. That's how I got my first property. We used a HELOC.

[Account Closed]

@Shiloh Lundahl HELOC's are something I've read quite a bit about; the issue I'm having right now is I don't have any property to my name.

@Chris Mason I’ve strongly considered house-hacking. Only issue I have with that is I’m currently in a unique situation where I’m living rent-free and I’d rather keep that expense pushed off as I continue to save. With my first property, I’d be happy to cash flow just a few hundred dollars a month or even simply breaking even. 

[Shiloh Lundahl]

@Account Closed That is fine if you don’t have property in your name. Look into getting a personal line of credit or a business line of credit. Sometimes it takes a couple of years to get business lines of credit.

[Alexander Felice]

You keep saying 5-10% down but you're not factoring in LTV and your purchase price.

@Jay Hinrichs is correct, but the house with a value add function and you can buy the house with nothing down. Maybe you need a bridge loan to get you there

from the way you write it sounds like you intend to purchase and pay retail, highly inadvisable. Also, you want to separate out the buying function from the loan process whenever possible.

[Rico Johnson]

Find a seller that is willing to sell on terms. You may be able to find a motivated seller that has recently had an eviction by researching your local court filings.  Approach them and ask if they might be willing to sell on terms. You make a small down payment to the seller, and you promise to refinance out  within an agreed period of time (24-48 mo.). At that point you will pay them off in full. You provide them a service where they will not have to maintain the property or worry about tenants. You in turn get a property with little to no money down with financing included. This approach will require you to do some marketing, and will require you to have your paperwork in order. 

[Roshan K.]

Talk to every local bank around you... I found one by referral that will loan to me on 85% LTV.

Also keep in mind, the better the deal is, the easier it is to get financing. 

Get an amazing deal under contract and then talk to as many lenders as you can. Show the numbers and how it is very profitable and someone will bite. 

[Stephen Herbert]

Hi Andy -

There are several ways to accomplish the purchase of an investment property with less than 20% down, but the reality is that any lender would require proven experience in the form of prior projects that the lender can verify. There are dozens of aspects to renovating houses that often come with experience and only experience, therefore if you lack any previous projects, you're likely looking at 20% down. If you change your mind and decide to move into one of the or bedrooms of the property, you could go with the FHA loan, but that's about your only option without any verifiable exits. 

[Henry Lazerow]

Do an owner occupant 4 unit with only 3.5-5 down. The biggest advantage will be living free and being able to save the money you would of spent on rent each month. This makes a huge difference in your ability to buy more properties. 

Other then that. Small banks sometimes do 20 down but its a riskier ARM and might not even be available as a complete newbie depends on location, etc. For a non owner occupant 25 down fixed is the safest option.

[Jonathan Bolano]

@Shiloh Lundahl I have a follow on question to your comment about using a HELOC to help with investing. I am on my second house right now. I did a live-in-flip on my first house and made 100k off it. I am in my second and in the process of determining if I should rent or sell it. Either way, I used the 100k to pay off college loans and own a home that I have now updated. I created some equity and now have a HELOC sitting there. I would like to avoid touching this at all because I have other plans for it. My question is, if I own my property, what are my chances at getting a hard money lender to fund me purchasing a multi-family and potential renovations? I would follow on by getting it rented, refinancing, and then paying back all money borrowed. HELOC would be used to help assist with updates and paying off lender until home is refinanced. Is what I am trying to do possible or out right bad idea?

[Shiloh Lundahl]

@Jonathan Bolano What you are describing sounds perfectly legitimate to me. Have you reached out to any hard money lenders (HML) in your area? They would be the best people to ask. But in all honesty, your primary home usually doesn't have much to do with getting a hard money loan. A HML usually wants to know your track record and if you have enough money to finish the project, and enough for carrying costs, and unforeseen events, and then they will lend you according to what they feel comfortable with. If the ARV is high enough then a HML may even lend on the rehab. We had a lender lend 100% on the purchase and almost 100% on the rehab because the numbers were 112K for the purchase, 100k for the rehab, and an estimated 285 for the ARV. They ended up lending 200k in total to put them at that 70% ARV mark.

So I would say it depends on your track record, your available cash, the numbers, and the relationship you build with your HML.

[Jonathan Bolano]

@Shiloh Lundahl thank you for your response. I have not reached out to any HML in my area as of yet because I am still in the research phase. My next question would be around how to handle the contract/agreement with the HML. I'm sure there is paperwork involved and I am really confused on this part. I understand the ARV and the deals I am interested in at this moment have a purchase price around 150 and ARV of 250-300 with possible 40k work. I think it's a sure deal. Until I find out how to properly create an agreement between the lender and I though, I am hot stop because I am trying to make sure I have all my basis covered prior to committing.

[Shiloh Lundahl]

@Jonathan Bolano A hard money lender will have their own docs. They lend money professionally. Private money lenders may not have their own docs and you may need to create those docs.

[Tiffani T.]

Hi Andy,

It seems like you have a wide spectrum of really good responses on here. If you haven't already owned property, then my suggestion is for you to purchase the first-time home buyer property and let it become the "primary residence". You may get by with less than 20% down. Then after one year of residency, you can convert that to a rental home (depends on your home mortgage terms and conditions). I completely understand that you would want to reserve those cash, which is very important to become a landlord. You may also try VA loans (if you are a veteran) or FHA etc.

Tiffani 

[Brent Coombs]

@Account Closed, a couple of responses have specifically mentioned 85% LTV (15% down). That is normal for a conventional Investment loan, so long as it's for an SFR (only).

Here is the link to Fannie Mae: https://www.fanniemae.com/content/eligibility_info...

[Whereas, you might still be better served to keep saving, 25% down, for a multi!] My 2c.

[Nghi Le]

@Account Closed

Some HMLs will not recognize HELOCs as being part of your available cash until it's actually in your bank account, and some HMLs might even want it seasoned for a couple of months.

Probably the best next step of your research is to contact HMLs directly to inquire about their loan programs.  Do this before you even put an offer on a deal.  You want to have your financing figured out and potentially pre-approved before putting in earnest money.  This doesn't put you in a commitment to use them; feel free to shop around.

If you are considering 5+ multifamily, terms are often different (i.e. more down payment) than the traditional 1-4 units because these are considered commercial properties.  Again, talk to your lender to hash out the details.

[Sara Abernethy]

When I bought my vacation property, they offered to let me finance it at 90%.  I didn't take them up on it (though I wish I had that cash right now because I'm working on my next deal).  It's *possible* that it's because it's a vacation rental.  Of course it's also possible that it's because I was using a local bank and they just have more flexibility.  Just like anything else, you need to shop around and local realtors often knows which banks like to play.  

You may want to consider looking into vacation rentals regardless, especially if you're looking near your home.  I have 3 traditional rentals, and they cash flow just fine, but having this vacation rental that I can visit and enjoy, and make DOUBLE what i'm making with my traditional rentals, I'm hooked!!