No Reserve + Need Tenant to Afford Mortgage = Too much risk?

Jill F.

Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes

7y

Are you a handy, handy man?

3 Reply

Joe Pearson

OP

Manchester, NH · Member since 2019 · 45 posts · 12 votes

7y

@Jill F., Nope. I know a little and desperately want to be, but in all actuality I am not at this current time.

Are you thinking of a foreclosure or rehab?

-Joe

0 Reply

Jill F.

Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes

7y

@Joe Pearson No, I was asking, thinking about buy and hold... that is the only area where we play. We have found that there is almost always deferred maintenance when we purchase a rental property. Owners don't really seem to spend money on a property they are trying to sell unless they just have to. My thought was if you are handy and had a line of credit for emergencies you'd probably be ok doing a house hack... But perhaps it's different buying a class A rental property, anything that looks perfect to inspectors is probably out of my price range.

3 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

7y

Borrowing from a credit card is not a good idea. I think you know the answer to your question. There is nothing wrong with buying a multifamily home and living in one unit, but you need to have money or access to money if something goes wrong. Are you comfortable living with no reserves knowing something might happen? What would you do if the roof needed to be replaced or the hot water tank went?

4 Reply

Steve K.

Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes

7y

A few weeks ago I had to replace a sewer line and a furnace on the same day in the same building. Not a typical day, but it happens (and yes I scope lines and service furnaces regularly).

Don't assume you'll find a property that an inspector will find "absolutely" perfect, that doesn't happen, and perfect tenants are equally unicorn-like.

You might pull it off, and if you're a gambling man go for it, don't let us experienced folks stop you. But personally I like to have $20k in reserves when I take on a new property, for days when a sewer line needs to get dug up and replaced and the furnace decides to crap the bed at the same time (for some reason these things like to occur simultaneously in my experience, and just as a tenant breaks their lease usually).

8 Reply

Greg PowersPro Member

Real Estate Agent · Manchester, NH · Member since 2013 · 120 posts · 159 votes

7y

Given the age of the housing stock in Manchester that generally serves as rentals, you can forget about finding anything that an inspector would find to be ”perfect.” You should take that assumption out of your calculation, and then you’ll have your answer.

2 Reply

Joe Pearson

OP

Manchester, NH · Member since 2019 · 45 posts · 12 votes

7y

@Theresa Harris, I think I know the right answer, too, but I also know that getting into real estate with no money is possible, so I just don't understand how some of those methods relate to me. No, I'm not comfortable with no reserves. In the following order: sell retirement mutual funds, cash advance credit cards, withdraw from Roth IRA and 401k, get payday loans or something else.

@Steve K., I'm not assuming that I'll find an absolutely perfect property, I think there's like a 0.00001% chance of finding that. But, I'm theorizing here. I agree, $20k sounds reasonable.

@Greg Powers, Yeah, the average home I'm looking at was made around 1905.

So, knowing there's a book on how to invest with low or no money and a lot of people post about investing with no or low money, I just can't believe there's no way for me to get started with low money, I just can't tell which or if any of those methods apply. Well, perhaps the only feasible one is investing with a partner, but I need to do more research to figure out how or if those would work with FHA Loans.

1 Reply

Damaso Bautista

Rental Property Investor · Hawthorne, CA · Member since 2018 · 655 posts · 900 votes

7y

@Joe Pearson

When I bought my first home I barely qualified for the loan and it was an adjustable at that. The loan adjusted up a couple of time very rapidly and there were a couple of months that I barely made the payments along with my bills, food and necessities. I am of the belief that If you want something bad enough you will do what it takes to make it happen.

I was able to refinance to a fixed lower rate at that time which got me where I really needed to be.

Real estate is a risky game and you have to have some guts to succeed. If you don't have the stomach for it then I would suggest not even getting started because you might become an emotional wreck and get ulcers and such.

But if you want to be in the game sometimes you have to take some risks.

Figure out how much risk you can tolerate and go for it. If you can't take that amount of risk figure out another path to get to where you want to go that is less risky.

If you need a bigger down payment save all your pennies until you have your down payment.

If your stuck on a certain neighborhood that is above your means, switch to one that you can afford.

There are a million ways to get to where you want to be.

Plan like a mad man. Make sure your plan is solid. Check it and check it again. Once you have laid out your path then go down it with precision staying on course.

You can do it.

Good Luck!

15 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

7y

@Joe Pearson Is your immediate goal to buy a place to live in so you are paying your mortgage and not someone else's or to get into the real estate market? Could you buy a less expensive family home where you could perhaps live on your own or rent out a room for a while to increase your cash reserves? I know your long term goal is to have rentals, but this would be a good place to start. Buy the house as if you were going to rent it running the numbers to make sure it would be profitable as a rental later on.

4 Reply

Darius Kellar

Real Estate Coach · Member since 2018 · 246 posts · 216 votes

7y

@Joe Pearson LOL This is a good question for Dave Ramsey .

3 Reply

Joe Pearson

OP

Manchester, NH · Member since 2019 · 45 posts · 12 votes

7y

@Damaso Bautista, The loan adjusted up for appreciation/inflation while you were living in the home?

I really want to buy a multifamily, but the dollars I currently have don't add up to where they need to be for the neighborhood I'm currently in.

I absolutely want to get in the game and understand the risks, but I think there's too much risk with my current plan for this year.

There are a million ways, but what's the right way?

@Theresa Harris, My immediate goal is to buy a place to live in with the later goal of using that as a real estate investment. Yes, I have 3 plans drawn up to either buy a duplex/triplex, a single family home, or continue renting, pending on what comes available on the market over the next couple months.

@Darius Kellar, Indeed it would be, but I'd pose to him the question of what my plan should be to make it work this year.

Thank you, all!

-Joe

0 Reply

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

7y

@Joe Pearson

Sorry if I missed this answer, but, will somebody give you a mortgage for this? Second, if so and you do find a property, ask the seller for a couple thousand towards closing (could even roll into mortgage if it appraised), and ask seller to buy a 12 month home owners warranty. That gives you a year to sock away some capex money without the worry of a major expense. Even though I have the money I always ask for the warranty from sellers.

Now, if you’ll be completely strapped for a while even with fully occupied units then you need to adjust your cost downward.

3 Reply

Joe Pearson

OP

Manchester, NH · Member since 2019 · 45 posts · 12 votes

7y

@Anthony Wick, No, you didn't miss the answer to that because I foolishly didn't mention it. I am pre-approved for a 270k mortgage and they are basing the 6 months cash reserves from my retirement funds and how much I make not including my fiancee's student loans. OOoo, I need to look into the home owners warranty.

No, assuming the idea of a home owners warranty from the idea of it and knowing the approx. $170 cash flow I'd get with a tenant I would be in the positive for the first 12 months.

-Joe

0 Reply

Damaso Bautista

Rental Property Investor · Hawthorne, CA · Member since 2018 · 655 posts · 900 votes

7y

@Joe Pearson

An adjustable rate mortgage starts with a very low interest rate allowing someone with less income to qualify for a loan initially. The problem is the person who gets the loan can barely make that payment and when the interest rates rise, so does your loan payment. That is what happened in my case. Luckily at the time my interest on the loan was rising I was able to refinance and get a fixed 30 year loan that brought my interest rate down which brought my payment down. to where I could afford it.

I hope this answers your question.

0 Reply

Account Closed

Rental Property Investor · Central, FL · Member since 2016 · 950 posts · 821 votes

7y

Originally posted by @Joe Pearson:

@Anthony Wick, No, you didn't miss the answer to that because I foolishly didn't mention it. I am pre-approved for a 270k mortgage and they are basing the 6 months cash reserves from my retirement funds and how much I make not including my fiancee's student loans. OOoo, I need to look into the home owners warranty.

No, assuming the idea of a home owners warranty from the idea of it and knowing the approx. $170 cash flow I'd get with a tenant I would be in the positive for the first 12 months.

-Joe

Is the 170 positive after paying just the PITI? Or does that include all the normal expenses, vacancy, repairs, capex, PM (regardless of if you do it yourself).

If you can’t afford the mortgage if there were a vacancy today, what does it take to make it so you can afford it by yourself?

Keep looking and find something that works, maybe a 203k fha Loan on a fixer upper. Or check out the hud homestore for deals that work. Who knows you could get lucky.

0 Reply

Caleb Heimsoth

Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes

7y

@Joe Pearson. No don’t buy this. You’re playing with fire that has a realistic chance of ending in foreclosure and you losing your house and wrecking your credit

7 Reply

Mike Bean

Worcester, MA · Member since 2018 · 69 posts · 41 votes

7y

@Joe Pearson I'm in a very similar boat. I plan to acquire my first property within the next few months and I'm analyzing deals I get pushed from the MLS a few times a week. I'm similar because I will only be able to afford the down payment on an FHA loan, I will need tenants to pay the mortgage or I'm screwed, and I don't have a large sum of reserves that were mentioned in the thread. My solution to these problems was to find a partner.

Now, I can afford the down payment by myself and with seller concessions I can cover the closing costs. As @Anthony Wick was saying you can roll the closing costs into your mortgage. (eg. ask price $200k, you offer $210k with $10k concessions, and you get that extra 10k back to cover closing costs) In the end the seller still gets his $200k and you simply carry a higher loan balance for a lower buy-in. I will be setting aside 8% each month for vacancy but with a partner I would only need to come up with 50% of the mortgage if I had a vacancy today. My other budgeted reserves are 5% repairs, 10% CapEx, 10% PM which will take time to build up but are definitely necessary. Have you factored these numbers into your analyses?

0 Reply

Dieggo Goncalves

New to Real Estate · Marietta, GA · Member since 2018 · 169 posts · 40 votes

7y

There are hundreds answers to your question.

I wouldn't depend on having renters pay in order afford mortgage payments. I am on the same boat, and would only purchase a Multi that I know I can afford, if tenants default. But that is me, and my risk tolerance.
Are you able to cut down on expanses and increase income to have a cushion each month?
Another problem we have in most of NH, are high property taxes, so, with FHA and only 3.5% down, it is almost impossible to cash-flow. You would have to find a turnkey triplex for about 150k. Almost impossible in this area right now.
Check out NACA. You may be able to purchase a fixer-upper with 0% down, 0 closing costs, no PMI, and save your 3.5% for reserves.

Best regards,
Dieggo Goncalves

Originally posted by @Joe Pearson:

So, I'm planning on purchasing a duplex or triplex within Manchester, NH, but my fiancee and I can only afford an FHA Loan 3.5% down and 4.85% interest, 30 yr mortgage, and that will leave us with practically no reserves and we can only afford the home if we have renters.

True, technically we could cash advance our credit cards, pull from retirement funds (Roth IRA, 401k and mutual funds), but we really really don't want to.

I apologize for not poking around on the forums enough to answer this question myself, I tried for a few hours but couldn't find an answer with enough similarity or that could help out enough (I am absolutely sure there is, I just wasn't looking in the right places).

Assuming we find a duplex/triplex that looks absolutely perfect to 2 general home inspectors and it comes with 1 vacancy (for us) and the rest rented with leases and they are perfect tenants. Would the risk still be with it? Would the juice be worth the squeeze?

For reference, my long term goal is to be a buy and hold landlord with small multi-families (probably under 4 units), so I would keep this property.

Thank you!

-Joe

0 Reply

Jeff Barnard

Rental Property Investor · Nashua, NH · Member since 2016 · 14 posts · 28 votes

7y

@Joe Pearson your desired entry point sounds similar to mine. I started by buying a 3-family in Manchester and living in one of the units. I was not cash-flowing positive on Day 1, but my monthly expenses were drastically less than if I were to rent elsewhere. However, I did have a "major" expense (~$3500) in my 3rd month owning the building, despite a thorough home inspection during the purchasing phase. Luckily I had plenty of cash saved up to deal with this, but if you are depleting your reserves and don't have the means to take care of unexpected issues you are asking for trouble. The "reserves" you have should be for real estate-related expenses (meaning you should also have your emergency fund for your personal life stored away separately).

I don't know what your current living situation is, but it sounds like you should focus on reducing expenses and increasing your savings. If you can focus hard on building up some extra cash, you may notice more options open up to you. If real estate is truly a goal, then cut the cable bill, get rid of the car payment, reduce the frequency of eating out, etc. and get than bank account built up (I am not accusing you of doing any of these things, just generic comments).

Have you read "Set for Life" by Scott Trench? The process he walks the reader through seems directly applicable to your situation. Reduce expenses, increase income, build up savings, deploy dollars into money-making assets.

5 Reply

Cassi Justiz

Rental Property Investor · Edmond, OK · Member since 2017 · 1k+ posts · 1k+ votes

7y

You could make it work, but you may be in for a bad time. Inevitable, SOMETHING is always going to come up.

If you can't afford a multifamily without a tenant in place, then don't get a multifamily yet. Vacancy happens. It may take you a few months to find the tenant that you want.

A multifamily property isn't the only way to house hack. For your first one, try buying a cheap house in a decent rental area that you can comfortably afford. Then add a roommate or two. Save all of the money that you can. THEN in a year or so once you have some money saved up, you can get that multifamily and turn your first house into a full time rental property. If you have good roommates, you can have them move with you.

It's not as cool as buying a triplex for your first deal, but it's definitely more reasonable than over leveraging yourself.

3 Reply

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

7y

@Mike Bean

You’re going to set aside 33% for reserves and pay 96.5% Loan to value? That is going to be very hard to cash flow. Of course, each property has to be analyzed on its own, but my reserve numbers are; 3% vacancy, 5% maintenance, 5% capex, and I self manage.

0 Reply

Mike Bean

Worcester, MA · Member since 2018 · 69 posts · 41 votes

7y

@Anthony Wick I'm going to be self managing as well but you even said to calculate that in even if you're doing it yourself. I'm using those numbers in my analyses, but within the analysis there are a few different scenarios. I agree it is difficult to find cash flow positive properties with these numbers but I'd rather be safe than sorry. 8% vacancy comes out to 1 month which is the max I see a unit sitting vacant. And 10% CapEx to be ready for something i'd Never expect. Think about it... 5 years down the line, although I didn't have strong cash flow, those reserves are there for me to use on whatever. Icing on the cake as they say

0 Reply

Mindy JensenPro Member

BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes

7y

@Joe Pearson , Murphy's Law RULES real estate. Every property I have ever purchased, something has broken within 2 weeks of closing.

Every.

Single.

Property.

The cost to repair the broken thing is inversely proportionate to how much money you have in reserves.

No reserves? Boom, broken, unrepairable furnace in New Hampshire on the coldest day of the year.

Plenty of reserves? One light bulb burns out in the microwave.

Do not buy this house. Save up for a decent down payment with plenty of reserves and start your investing experience on a GOOD note.

[email protected]Podcast Guest on Show #261

16 Reply

Dieggo Goncalves

New to Real Estate · Marietta, GA · Member since 2018 · 169 posts · 40 votes

7y

@Joe Pearson There you go, learn from the best.

Originally posted by @Mindy Jensen:

@Joe Pearson

3 Reply

Richard Dale-Mesaros

Investor · Campton, NH · Member since 2010 · 286 posts · 144 votes

7y

Scary as it sounds, you can get a 4-unit with an FHA owner-occupied loan, which is actually less risky, in that one vacancy represents a smaller % of your monthly rental income than in a duplex, plus you get economies of scale with 4 units under one roof. Yes, a major thing like a new roof is going to be more than on a duplex, so you have to weigh up which route to take. Totally agree with Mindy and the others about expecting **** to go wrong and some of this stuff isn't cheap like a new boiler etc. For me, the thought of remaining on the sidelines was way more scary than jumping in...... then again, if we're talking about skiing, I'm usually the one hucking myself backwards off cliffs in the woods! :D

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No Reserve + Need Tenant to Afford Mortgage = Too much risk?

No Reserve + Need Tenant to Afford Mortgage = Too much risk?

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