Newbie...Making it work with little to no down payment.

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Newbie...Making it work with little to no down payment.

Chad Smith
Contractor · Dana Point, CA · Member since 2016 · 10 posts · 4 votes

Hello everyone. This is my first post since joining and I'm going to ask a question that has been asked a million times before.  I hope this is the right forum for this question. 

How and where do I start?

I'm not a young guy or just starting out in life and I've been around real estate and real estate investing for pretty my whole life as an electrician or on the construction rehab side but never the guy doing the actual deals. I've even managed a few properties for other people. I'm just going to say it....I see people with no obvious experience bad credit or financials and they have no idea what they are doing make deals happen all the time.  I have a good paying steady job but little to no savings (I live in wonderful SoCal so pretty much everything I make goes towards living expenses) and I have average credit. The market crash killed me but I've been rebuilding for over 3 years now. Started at a 512 and finally as of today I have just over 640. I've been reading the forums and advice columns and have decided the best route for me is buying a duplex, triplex, fourplex or 5+. I read somewhere in the forums that on a 5+ units the banks look at the deal before they look at you. If it makes sense they are more likely to fund the deal but by the time I have a chance to present it to a bank or investor the deal is swooped up. My plan is to live in one and rent the others out. I'm currently a renter and am getting tired of filling up my landlords pockets. 

I originally started looking to buy just for myself but am having difficulty even getting financing or coming up with the required down payments. It's a bit discouraging actually. I find deals all the time but do not have the wearwithal to make them happen and by the time I possibly do, the deal has been swooped up by someone with cash in hand. Hard money or private investment doesn't work with buy and hold (or at least I haven't found that yet) and the banks won't even look at me for some reason. I tried the prequalify route but it's pittance compared to what it takes to actually buy something in Southern California. Anywhere else in the country it would buy a mansion.

Last year I set up a new company and formed an LLC. I've been in the process of building up the financials and credit for it but the road is slow and I'm basically having the same issue I did rebuilding my personal credit. Banks and credit card companies won't even look at me or my company.

Going back and reading this I realize it sounds a bit whinny but the question perplexes me as it probably does for thousands of others. 

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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y

Don't try to take the "easy way out" by running out of state just because it is cheaper ... there is a reason it is cheaper and by going remote you will give up a vast majority of control and your ability to assess and mitigate risk. There is still plenty of profit to be made in your own back yard even if (and often times because of) it is more expensive. If you want to flip deals in Iowa, then ok, move to Iowa. Otherwise, the market is not your problem, don't blame it (not that the market cares if you do) ... find out what the root of your problem(s) is/are and attack the problem at its root. Why won't banks lend you money? Why are you not able to invest? Why do you not have the money to put down? Following these types of questions in an honest fashion will lead you to the root of your problems so that you can solve them, but one thing I can promise you for sure is that it is not the market's fault, and therefore trying to blame the market and move to another won't solve a thing ... in fact, it is likely to create more and other problems IMO.

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  • Andrew Savikas
    Investor · Milford, CT · Member since 2016 · 77 posts · 55 votes
    9y

    @Chad Smith If you're planning to live in one of the units, seems like a good fit for an FHA 203k loan, which could require as little as 3.5% down. There's lots of threads here on the topic, including this one and this one.

    1Reply
  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    9y

    @Chad Smith

    Hi Chad, Banks will not lend directly to LLC's without the company having a solid business history and financials to support getting a loan. They usually want the company to be in business for at least 1 or 2 years so getting financing for an LLC is extremely tough for a new investor.

    As for the credit side of things, have you spoken directly with any bankers about obtaining credit or have you just been applying online? I'd figure speaking to someone in person would give you a good idea of where you stand and can give you some guidance in terms of obtaining credit cards for your business.

    You should look into house hacking using FHA on a 4-plex as they allow for lower credit scores and down payments even though SoCal is ridiculously expensive so 3.5% of anything will still require a fair amount of capital. Try contacting regional banks and credit unions if you have not already done so as they tend to be a little easier to work with over the big box banks.

    0Reply
  • Timothy Maloney
    Lender · Syracuse, NY · Member since 2016 · 165 posts · 92 votes
    9y

    @Chad Smith We'll loan to your LLC so long as you have credit and *some* money down. The programs with the least cash down are short term bridges for Fix N Flips. You could move a $100,000 property with less than 10,000 out of pocket.

    There are even a few guys in CA offering 100% financing Plus 90%+ of the rehab once you prove yourself in the Fix N Flip.

    Buy and Hold will require 20% minimum as I am sure you are aware.    It would be *possible* to fix N flip the RIGHT property with 10% or less down and refinance it long term in a year using the equity you created.    It isn't easy - and it would depend on the property & your credit.

    I'd caution you borrowing on an investment property using an FHA/Fannie/Freddie as that's not what those programs are intended for. Unless you live in one of the units you run the risk of big troubles down the road.

    Stick with it and good luck!

    0Reply
  • Chad Smith
    OP
    Contractor · Dana Point, CA · Member since 2016 · 10 posts · 4 votes
    9y

    Excellent advice @Andrew Savikas @Bob Okenwa @Timothy Maloney.

    There's the rub. In SoCal 3.5% on a multi family property easily exceeds $30k+ down. I know this might sound like an excuse but $30k down is just not currently a reality. 

    @Timothy Maloney that's actually really good news. I've personally been involved with many fix and flips (construction side) so I have a pretty good grasp on what it takes and I have access to good contractors that will work with me. As far as FHA/Fannie/Freddie that might be a viable route as I plan on living there.

    The main issue in SoCal is the amount of money it takes just to do a simple fix and flip. In other parts of the country that would do 30 to 40 deals! I recently went back to the small town I grew up in in Iowa and the deals there are obtainable. I found a 3 bedroom house that they basically were giving away. 

    $15k purchase

    $40k rehab

    $85k ARV

    My cousin has a really good realtor there and does these types of deals all day long and pretty much doubles his money. 

    But then again that's in Iowa 2000+ miles away. Lol 

    0Reply
  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    9y

    @Chad Smith

    I'm from San Diego and my siblings reside in the LA area and I laugh every time we talk about real estate because of what I'm able to afford in AZ vs CA so I fully understand the financial plight of buying in CA. Perhaps rehabbing out of state can be something you consider as the buy-in costs are substantially lower and the amount of available properties can be much greater with less competition depending on where you choose to invest whether it be in Iowa or anywhere else in the Midwest.

    0Reply
  • Timothy Maloney
    Lender · Syracuse, NY · Member since 2016 · 165 posts · 92 votes
    9y

    @Chad Smith  Go to Iowa...  for 1-2 flips.   You can do the one you mentioned with $7k or so.     It's a start.   Even if you just did the one flip you described that's 25k+ profit.    

    0Reply
  • Chad Smith
    OP
    Contractor · Dana Point, CA · Member since 2016 · 10 posts · 4 votes
    9y

    Thanks guys!

    Sometimes the obvious is not so obvious :-)

    You're right @Timothy Maloney do a few deals in Iowa that aren't so capital intensive and work my way into the SoCal market.

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    Don't try to take the "easy way out" by running out of state just because it is cheaper ... there is a reason it is cheaper and by going remote you will give up a vast majority of control and your ability to assess and mitigate risk. There is still plenty of profit to be made in your own back yard even if (and often times because of) it is more expensive. If you want to flip deals in Iowa, then ok, move to Iowa. Otherwise, the market is not your problem, don't blame it (not that the market cares if you do) ... find out what the root of your problem(s) is/are and attack the problem at its root. Why won't banks lend you money? Why are you not able to invest? Why do you not have the money to put down? Following these types of questions in an honest fashion will lead you to the root of your problems so that you can solve them, but one thing I can promise you for sure is that it is not the market's fault, and therefore trying to blame the market and move to another won't solve a thing ... in fact, it is likely to create more and other problems IMO.

    3Reply
  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    9y

    I think that looking to less expensive markets that may net better returns is much better than sitting on the sidelines and waiting to save up for a down payment is CA. If 30k can get you 2 deals in another market while getting 0 in your current market, what is wrong with looking to get going somewhere else? I've seen plenty of people invest in lesser-expensive markets and be successful. 

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Bob Okenwa:

    I think that looking to less expensive markets that may net better returns is much better than sitting on the sidelines and waiting to save up for a down payment is CA. If 30k can get you 2 deals in another market while getting 0 in your current market, what is wrong with looking to get going somewhere else? I've seen plenty of people invest in lesser-expensive markets and be successful. 

    The problems are two fold: 1)Why is it less expensive? Normally it is because that market has weaker supply and demand fundamentals. While it is still possible to make money in these markets in the short run, over the long haul it has been my experience that you make far more profit with far fewer headaches in markets with greater demand and more limited supply relative to that demand (which is why they are expensive in the first place). Even more importantly 2)when you go out of state as a newbie, to a market you are not as familiar with, have severely limited physical access to, have limited or no network, and no way of practically gaining hands on experience, then you give up nearly 100% control over your investment and lose your ability to assess and mitigate risk. If you are going to give up 100% control and ability to asses and mitigate risk, then you would likely be much better off buying an S&P500 stock index fund and calling it a day. The entire reason that makes Real Estate investing an attractive investment class in the first place is your ability to actively control the investment, analyze, and mitigate risk, and you give that all up going out of state as a newbie. Sure, many may argue otherwise, but they are mostly either newbies that don't have much experience actually doing it and any experience they do have has been over the last year or so in a market where a well trained monkey could make high profits investing in RE or people trying to sell you stuff elsewhere. The few that I've seen succeeding at it over a sustainable period are very experienced with large scale such that they can stand up their own in house management team that does nothing but work for them managing their assets ... and how did these folks gain the experience, knowledge, and capital to scale up like this? A vast majority of them learned by first operating locally and then expanding their finely tuned systems to other markets. I've done both in state and out of state real estate investing for the past 15 years, and have nothing to sell either way ... this advice is based on personal experience and observation of others over a long period of time.

    2Reply
  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    9y

    @David Faulkner

    You make some very valid points that I can agree with and I'm not saying you are wrong. Your experiences have led you to that opinion. I just don't see the advantage over waiting would could be years to invest in CA to get things going rather than taking advantage of an opportunity elsewhere. Yes you will lose some influence over not being physically present and this isn't something I'd suggest to newer investors, but to some, this is better than being priced out of a market and giving up. And most of the CA market is horrifically inflated not due to demand as much as it is to lack of supply.  The prices are driven up there because there's nowhere else to buy and options are extremely limited. 

     I lived in San Diego for 21 years and currently live in the Phoenix area with a metro population that is about 1 million people larger than SD and have seen that the demand for housing is roughly the same in both areas, but Phoenix wildly outpaces SD in new construction and this is a large part of the reason home prices here are lower. I bought my personal residence last year for a little over 400k and the same house in SoCal would have been at least 900k if not a $1 million.

    My whole point is that it may be beneficial to cut your teeth in a market where you can afford to invest rather than do nothing with your money for years on end playing the waiting game. Living expenses are extremely high in CA and unless you make a great salary or live in a shoebox-sized apartment in an awful part of town, most of your income will be dedicated to living expenses. With that being said, yes you still have to make sure you credit is appropriate and try to save money where you can. I personally would invest in CA if I had that kind of capital as I am familiar with the area and it's only 1 state over. I wouldn't fly to Florida and begin as that is too far out of my comfort level at the moment. Different strokes for different folks.

    0Reply
  • Paul Nguyen
    West Des Moines, IA · Member since 2014 · 5 posts · 0 votes
    9y

    Chad, i am new to this and would like to start at some point. you mentioned your cousin know a real estate agent that can find these deals. Would you share the real estate agent contact info?

     Thanks

    Paul 

    0Reply
  • Chad Smith
    OP
    Contractor · Dana Point, CA · Member since 2016 · 10 posts · 4 votes
    9y

    @Bob Okenwa and @David Faulkner you both make valid points. I know that what both of you have said has made me really look at myself and my goals and why I haven't been able to achieve them. I do have opportunities both in state and out of state and I just need to apply myself and stop making excuses. @Paul Nguyen I'm fairly new to this format but I think you can pm me and I'll send you her information. 

    0Reply
  • Chad Smith
    OP
    Contractor · Dana Point, CA · Member since 2016 · 10 posts · 4 votes
    9y

    Hi @Bruce May thank you for the offer. I'd like to learn more.

    0Reply
  • Chad Smith
    OP
    Contractor · Dana Point, CA · Member since 2016 · 10 posts · 4 votes
    9y

    Morning Everyone

    Ok so I found a 4plex in south OC. I'm wondering what your strategy would be on this property.

    Here's the numbers:

    Asking $1.6MM

    GSI $82,200

    NOI $55,700

    CAP 3.38%

    The property has been well maintained and doesn't (from what I see) need any repairs. 100% occupancy.

    2 2 Bedroom 1 Bath 

    1 3 Bedroom 1 Bath 

    1 3 Bedroom 2 Bath  

    2 2 Car Garages

    Community Laundry

    I plan on living in one of the lesser units so rents are maximized as best as possible and the property has a really good walking score. Rents were scheduled to go up April 1st so I'm not sure if that increase is included in the GSI. The expenses number is inconsistent as they claim more expenses than what is showed.

    0Reply
  • Account Closed
    Spanish Fork, UT · Member since 2017 · 4 posts · 0 votes
    9y

    @Chad Smith

    I know of a company that teaches people how to buy and sell houses Without using there own money or credit. If your interested I can share the link with you?  I currently am taking their course and I personally have learned quit a bit in the short time I have been signed up. 

    0Reply
  • Chad Smith
    OP
    Contractor · Dana Point, CA · Member since 2016 · 10 posts · 4 votes
    9y

    @Account Closed would love to know more.

    0Reply
  • Aldo Cadenas
    Norwalk, CA · Member since 2016 · 12 posts · 6 votes
    9y
    Chad Smith hello chad I live in Norwalk glad to see someone close
    1Reply
  • Herman Virgen
    Los Angeles, CA · Member since 2017 · 3 posts · 1 vote
    9y

    Chad, So what did you decide to do ultimately??

    I am in a similar boat as you but have been hustling like crazy.

    I would take advantage of the boom here in Socal and make as much as money as possible in the trades (before the **** hits the fan again). Raise your prices, take on more work by subbing out, buy your material as cheap as possible and in bulk on credit cards with low interest and cash back rewards.

    Ruthlessly cut away your expenses and the unimportant , Refinance your truck, move to a cheaper place, fire one of your guys, make sacrifices. This will allow you to save money that you can put in a "freedom account" (see tony robbins or grant cardone) by investing in a secure environment where you can get 4% to 7% on your money. This will allow you to have some capital for when you find a good deal.

    0Reply
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