Can you get a conventional loan on a property below $40k?

Question

Hi everyone, 
Before I begin my business of acquiring rentals and managing I want to know if banks are willing to finance with a conventional and 20% down a rental under $40k. I understand that cash flow is better with these homes but I am analyzing my options right now. These homes obviously have more deferred maintenance since they are in class c neighborhoods but are they good rentals or do they attract mainly bad tenants. I need to sit down and write out my business plan of what I want to incorporate in my acquisitions.

Charles M. · Answer

hmmmm 5 years ago

David A. · Answer

Thanks Tim and David for your thorough answers. $850 for a $35K property that is awesome. David what you wrote made me take a closer look at multis. My wife's stepdad is opening a school in China with some investors and they are looking to buy income properties in my area. I want to structure some deals for them once I gain more experience. I am a bit stuck on estimating the cost of repairs but I am meeting with an investor in my area that is familiar with flips. Thanks again

David Beard · Answer

Great replies above.

If the house is immediately financeable (foundation OK, copper intact, etc.), then you might check with Citimortgage (https://www.citimortgage.com/Mortgage/Home.do). I was just talking with them, and they will lend on up to 10 financed properties, and they have no minimum loan size like most mortgage brokers and smaller originators.  While the closing costs on a smaller loan will be high as a % of your loan amount (since about $1,500 of the closings costs are fixed in their amount--appraisal/credit/bank fees/title search/closing fee/misc)
,you will recoup this in spread profit in the first year, and then gravy from that point forward).

You're probably well aware, but from strictly a loan standpoint, tri's and quad's are a more efficient use of your conventional lending capacity.  You can buy a 4-unit building for $30k per unit, with rents of $650/unit, for example, in a C+ area.  That is a $120K purchase for the property, and can go to 75% LTV, and the fixed closing costs are spread over your 4 units.  Plus you only use one of your conventional loan bullets, versus buying four cheap SFRs.

If it needs quite a bit of rehab, the way to go is:

1) Small local bank or credit union that will do a rehab loan for a 12-18 mth term.  There are still some out there, so call around.  Pay 7-9% plus 1 pt, for example.
2) Private lender that is an associate of yours (family, friend, professional contact, etc.).  Pay 7-10% plus 0-1 pts, for example.
3) HML.  Pay 12% + 5 pts, for example.

Tim Delp · Answer

I have seen some lenders be willing to do loans below those numbers although you will need to do your homework to find them.  When you refer to deferred maintenance as mentioned above that will be a critical issues with any mortgage at any amount.  If it is minor deferred maintenance you should be okay but if the house is not habitable (from lending standards) that will be a problem.  I agree with the above post that if you are buying and making substantial improvements than it might be best to use hard/private money and get your loan, make the improvements and then refinance.  Most lenders here will require that you have owned the property 1 year to go off appraised value, which would be what you would most likely want to do to get the most money out of the property.  Prior to 1 year most will allow you to base your loan amount at 75% of your acquisition cost plus documentable improvements.  
I've owned rentals going back about 10 years now and do know that you can get in to some rough areas.  I did just recently buy my first property for $35,000 that is rented for $850 and it has gone very well thus far, I had to make no repairs and it was already rented.  It is in a neighborhood I feel safe going to and have great tenants.  I think in every city there is a point where prices continue going down but the rent for a 3 bedroom 2 bath home doesn't drop at the same pace as the home prices.  
The key as with any price point is going to be to screen your tenants, I think at these lower price points you have to focus on their history of paying rent and their sources of income, not necessarily their credit.  Or many times you can get a section 8 renter.  The other benefit with these types of neighborhoods is if you take good care of the property and your renter they are more likely to stay long term in the property, not as likely to buy anything nor are they typically getting relocated for work like might happen with more expensive neighborhoods.

John Chapman · Answer

The short answer is no, you generally can't get a conventional loan for less than $50,000.  I've looked pretty hard and my understanding is that it's just not profitable for the banks to make a conventional loan at such a small amount.  Also, you want to consider that most houses with deferred maintenance in our area won't qualify for conventional financing.  If they are in too bad of shape, banks won't lend on them.  (as you know foundation is a huge issue in our area.)  The way I've done these is to use hard money to purchase and rehab and then immediately refi'd into conventional.  I'm in your area so feel free to pm me if you want to know about opinions or experiences I've had in particularly markets or areas.