How Did You Start?

Question

Hi All,

As there are many well established, and up and coming, rental property investors on here I figured I would ask this question of you.

I hear many different options for financing your first rental property.  This includes lease options, hard lenders, bank loans, etc.  I am looking into a few of these options for my first but I would like to know, how did you finance your first rental property?

Elizabeth Colegrove · Answer

@Adam Hathaway

My husband has a transient job (active duty military) so we move around alot. We got started at 23 and 25 when we were young and poor and still on one professional income, his LTJG pay, which wasn't all the high lol. Our first purchase was a single family foreclosure that was a cosmetic mess. In retrospect we got lucky because the VA approved it even though it was basically a cosmetic gutter with great bones and a FANTASTIC neighborhood.

My husband and i completely fixed it up with a little family help in the beginning. Soon after we bought the house I got a terrific job in multi-family/commercial real estate right out of my MBA program. I worked two jobs the first 4 months, since I already had a great tax job. We invested all of my income into 2 pure rentals before we were transferred again.

We use our transient military career to invest in personals because they have

1) cheaper down payment

2) Lower interest rates

We live off of one income (my husband's) using mine when it exists (it can take awhile for me to re-establish myself in a new area) into  pure rentals.

Because of our transient life style causing home to be "relevant" to the current set of orders. We are also investment for cash flow in 15 years not now. So we have a very unique busienss plan.

• We don't follow the 1%, 2% or 50% rule
• We invest in appreciating market/rent area
• Invest in Class A properties
• Self-Management- Saving management fees and regaining control
• Low Vacancies - nothing to date

In general we follow the south west airlines model. Smaller margin but operated tighter.

Adam Hathaway · Answer

Thanks @Kal Kazak @Kevin Felger @Nathan Brooks Elizabeth  Colegrove !

I appreciate all of you putting your time to provide feedback.  It was great hearing about how you started.  I am a numbers guy so as I have it here are the numbers so far:

Seller Financing: 1

Partnership: 1

Owner Occupied/Live in then rent: 2

Bank Financed/Investment only(not lived in): 3

Bryan N. · Answer

@Adam Hathaway

How much risk you are willing to take should be your first question.  I tend to be conservative.  I chose 20% down and the ability to personally afford the mortgage without affecting my lifestyle even if the property is not rented for extended periods of time.  That scenario allows my wife and I to sleep good at night.  Reserves as someone else stated reinforces that sleep good at night feeling.  There are lots of creative financing deals in real estate, but a lot of them carry more risk as well.  Figure out your risk tolerance and then work backwards from there.

Dick Rosen · Answer

I acquired my first 3 properties with seller carry backs to cover the down payment and sub primes loans on the rest. I wouldn't advise doing that way and I don't think you even can anymore but that's how I started.

Samuel DeMass · Answer

I started when I was 18 (pre-2007), so things were a little different.  In effect, I had a partnership, with my parents.  They brought their good name to the table and co-signed for me and I brought youth and sweat equity.  We were able to get 100% financing, plus some extra for rehab (although we didn't call it rehab then).

Kyle Hipp · Answer

My first property was a duplex in which I lived and rented out the other unit. I was able to go 10% down back in 2006 with pmi. The next property was a year later with the same financing setup but at the higher rate as a pure investment. 2010 was my next duplex purchase, this time with 20% down as lending standards tightened. Since then I have down land contracts or secured short term private lender financing and then backed into a mortgage with a bank. I think it is a lot easier getting creative financed deals after you have some experience and can provide the seller or folks with private money some confidence that you know what you are doing. That said if you ask enough people you will eventually get a yes but it might not be beneficial for either party involved either...

Nathan Brooks · Answer

@Adam Hathaway I agree with these guys ... there are always creative solutions for buying properties.  They are cool.  Sexy, and they sound awesome.  But especially in the beginning when you might not have as much cash in reserve accounts, and experience knowing the market, what the rents will most likely be, etc ... the more down, and more importantly, less leveraged ... the better.  For me, I put down nearly 40-50% down on my first properties because of my credit situation along with a private money lender.  It worked.  And it made me work at it, save, and make sure the deals were what I wanted.  Once you are able to establish a track record, and a comfort, then you can start working more creative deal structures.

Most, most, most importantly, is have reserve funds for repairs and cap X expenses.  So. Important!

Kevin Felger · Answer

My first rental was a fixer upper that I bought and lived in first.  I never intended for it to be a rental when going into it.  After fixing it up and living in it for about 4 years I got married and right before we got married my soon to be wife bought a house with the intention of us moving in it together.  Then we rented my first house out.  It was successful and we saved money from that and we just bought our second buy and hold house about 2 months ago.  Both time just had the cash from saving for down payment and got a loan from the bank.

Adam Hathaway · Answer

Thank Kal!  I have been doing just that, and I have the savings, but I would rather use more OPM if I can.  I ask to see how realistic it is to start this way as many people say you can but I would first like to see if anyone did.

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