Intro Rental Questions

[Hank Walter]

Hi It’s my first time so go slow,

I’ll be a college grad in the spring and am looking to invest right away. I’ll have a little debt (around 20k) and petty cash around (10k) with a credit score of 721.

I’m looking to get into multi-family properties, so I can live in one while renting out the other. I’ve looked around at loans and the 203k Loan has peaked my interest, but not sure if I could meet all the requirements though. I’ve worked throughout college but I’m not sure if that’ll suffice for the employment requirement. I’ve done a little research with trying to create a predictive housing model for the Minneapolis house prices, it’s still a work in progress.

I guess my questions are:

What are some other viable financing options for me?

Potential hurdles ahead?

With the 203k loan, adding in repairs to the principle of the loan, do I have to get actual contractors or can I do the work myself? I believe they require multiple estimates.

Books to read?

Thanks,

Hank

[Tim Swierczek]

@Hank Walter I know the 203K loan well and the 203K loan does have advantages if you are buying a seriously distressed property where your purchase price + rehab amount represents a value purchase. It is often considered by buyers who want to purchase properties that need TLC but are not discounted enough from the ARV (After Repair Value) to create a deal. Let's look at some examples.

Say you're buying a house where the Future value after repairs will be $150,000 (ARV).

If you purchase price is $100,000 then the repairs would need to be below $50,000 to create value otherwise you might as well just buy a property for $50,000 and save the hassle and risk of a remodel. The risk is that you budget $50,000 but end up with a final cost much higher and spend more than the house is worth. The FHA 203K would allow you up to $165,000 on this house (150K+10%).

How much below $100,000 you would need to spend to make it worth it is up to you and at a lower value such as this above the number I would want would be at least 10%. This is because of the risk mentioned above, plus the process of the remodel is a pain and is worth compensation in the form of equity. Also the 203K costs more than a traditional FHA loan. I have not priced one out for a client in a couple months but I would suggest that you assume the rate to be about .5% more than a traditional FHA, and assume around $1000-$2000 more in closing costs, which will depend on the rehab budget.

Another consideration is that sellers see the 203K loan as a negative when you make offers such that your offer will have the lowest priority even if you offer a great price, unless you are offering on a property that will not qualify for non-rehab financing, or you are the only offer and therefore not competing against other financing types.

To answer your other questions

Technically FHA does not require you to get contractors to do the work, however, I say this ONLY because if you look up the guideline I want you to know of this technically and not discount my other advice. The reality is that in my 17 years of lending I have originated more than 50 203k loans through all the biggest 203K lending sources and not one lender that I have worked with will allow you to do the work yourself. Not only will you need a licensed contractor but the contractor will have to pass a rudimentary background check from the end investor. Please do not assume this background check is enough for you to be confident in the abilities of your contractor. They are really just looking for super obvious scam artists that have been identified previously.

There are 2 viable multifamily financing options available for you. It would take much to long to go through all the reasons you might use on over the other, but the super short answer is after October 29, 2018, I believe the best first loan option is the FHA loan also called the 203B loan, it's just the standard FHA loan. You may also qualify for the conventional 5% down 2-4 plex loan. If your loan officer does not offer both and cannot explain to you in meaningful ways the pros and cons you will want a new loan officer.

The biggest pitfalls I see from newbie investors are:

1. Using a Realtor that is not an investor- most choose a friend, family member, or and while those people may be great to work with for a traditional home they will often not be able to help you find a good investment, and then what's the point.
2. Using a Loan officer that is not an investor-  I see this all the time and I just have to shake my head.  The strategies that work best to grow a portfolio are counter to what you would do when buying a single family primary residence.   This includes rate choices, loan program choices, mortgage insurance choices, and down payment options.  I often have to work with investors to undo the financial mistakes of their early financing choices.
3. Over analyzing properties and getting caught in the analysis paralysis trap.  I did this myself between properties 3 & 4 and it cost me many years of what in hindsight would have been great deals.  
   
   Good Luck and please PM me if you would like to meet for coffee.
   
   ~Tim