Rent-To-Own as a first investment?

Question

Hey BP community, I am new to BP and to the RE world, however, I really want to make my first move but I need your help. I just graduated from college, I've only been working for a year. I have about 40k in savings but only 3 months of credit. So No bank will give me a loan and I live in Cali so it's extremely difficult to find a property under 180k. I am getting married This May(3 months) and we need to find a place ASAP. I would hate to rent a place and throw my money away in rent,so I was wondering if you guys recommend for me to find a property where I could rent-to-own and live in it for two years and eventually turn it into an investment property? Yes or no? Why? Any other options that are out there that you might recommend as my first investment for where I currently stand financially? Thanks Guys

Kevin Hamblin · Answer

@Albert MeloAlbert, Be Careful of the advice you get from people on BP. There are hundreds of ways to purchase and sell a home. It sounds like you are buying the home to live in. That opens up a lot more opportunities than if you are purchasing it for an investment.When you are purchasing a home for an investment and even to live in for that matter, it is ALL about the numbers and the terms. If you are going to live in the property, you can get better terms, Interest rates, less money down etc because it is owner occupied. FHA, Conventional, or VA(if you are a veteran), typically have better rates and you can do as low as 3% or less down if you are a first time home buyer. These loans can be harder to get because they have stricter requirements, but having a co-signor is a great idea.I disagree with Steven that lease to own is a horrible way to buy, I bought my first home on a lease to own and then got financing after 3 months and made over $80,000 when I sold it 3 times on lease option. The thing to keep in mind about Lease to Own is that if you are buying from an investor, odds are that the deal is in their favor, do your home work to make sure you are getting a great deal.If you find someone that is a motivated seller, lease to own might be a good way to buy because they just want someone to make the payment. You are not a true owner on a lease to purchase until you get title. So you are still a renter. This can be a lucrative way to buy real estate and flip it to someone else on a Sub-Lease to Own and make money on the spread. In the case of a motivated seller it is better to do a Owner Carry or Subject To. You then have true title (ownership) and using OPM (other people's money).You can start a business and get a Business Line of Credit combined with Subject to or Hard Money loan with a 3 or 5 year fixed to give you time to build your personal credit. Hard Money Loans Typically have higher interest rates from 8.49% to over 14% and loan origination of 1 to 5 points. Again This is a great idea for investment properties or short term to get you into a home and then refinance in a couple of years. Remember it is ALL about the numbers and the terms. How you buy the house will determine your exit strategy of when and how you sell the property. If you purchase the house using your credit and with the intent on living in it, then you can sell it any way you feel comfortable and make the maximum amount of profit. If you do a high interest rate hard money loan that has a 12 month balloon you are limited to selling it within 12 months or refinancing it.If you do a business line of credit and Hard money loan to get 100% financing and the hard money loan is for 3 or 5 years, then you can do a short term buy and hold, sell it on lease option, for 1-2 years and you get higher rents (more cash flow), you get appreciation, You get the interest tax write off, you get larger down payment 10-15% of the future value of the house you get the pay down of the loan, you get back end profit from the house if you buy below current market value, and you get to depreciate the house on taxes as well. 5 streams of income. If you do an owner carry sell then you get all the above streams of income except the depreciation. You still get to write off the interest you are paying on your loan but the new owner gets to write off the interest they are paying you.So your exit strategy is determined on how you purchase the house. As a new investor please do not get into the mind set that you only have to fix and flip, or just whole sale, or just buy and hold because you miss out on many other ways to make money as an investor. Hope this helps,Kevin

James Wise · Answer

@Albert Melowelcome to the site. I don't know much about rent to own but that is a pretty decent amount for a downpayment on an owner occupied home.Perhaps you can get a parent to co-sign?

Account Closed · Answer

A good place to start is with your local real estate agent ,craigslist ads (can be a pain but)

Account Closed · Answer

Rent to own are usually bad deals that at best are only a savings plan plus you get no benefits from home ownership.You have a decent down payment to look into owner who will fiance properties. I would suggest take your time and do not try to hurry the process Build up your credit slowly and study your local market

Brian Gibbons · Answer

@Kevin HamblinLoved that post.BP folks either hate sub 2, lease options and wraps or love them.Bp Readers remember there are many opinions here. Some are pro, some are anti creative solutions.

John Powell · Answer

With that down payment you may be able to find a local community bank or credit union to underwrite the loan manually. If you find a good deal on a house that is below market value and you add a 20% down (40k on 200k) then the bank would be in a good position. Many times at small community banks you can go sit with the banker that is making the decision on the loan. I did this for my first rehab I had some cash and went to the community bank and brought the president the deal and shows him my plan and he wrote the loan as a construction loan. The advantage was that he knew the nice neighborhood I was talking about and could see the value that I was going to add. He wrote the loan and I put 80k equity in my pocket. I now have a relationship with the bank and can call and ask questions and they will work with me for creative financing.

James Wise · Answer

You would need to speak with a loan office and get prequalified. The question cannot be answered until your parents finances as well as your own are looked at.

Adam Hershman · Answer

Hey Albert, If you can get your parents to cosign, or even if you can't you should still try to get pre-approved for a home loan. FHA loans are frequently used by first time buyers because the credit restrictions are a little more lax than a typical mortgage. Additionally depending on how much you make and where in California you live, you may be eligible for down payment and closing cost assistance, o you could potentially get a 3.5% down FHA loan with down payment and closing assistance, and keep the majority of your $40k to actually purchase an investment property that is more in line with your price range. The easiest thing for you to do is do an application online with whoever you bank with for a pre-approval, that way you know where you stand in terms of conventional financing, and then you make a better decision on how to proceed. Don't discount a traditional mortgage just because you think you wont get approved, if you are right and you can't get approved, at least make them reject you before you rule it out. Adam

Jeremy Pace · Answer

One of the ways that I look for owners who may be interested in owner financing is to check a listed property for liens. Where I live (allegheny county, PA) you can look up the owner of a property and then look to see if they have any mortages online for free. You can also pay and the process is "smoother". It is possible that this same kind of service is available in your area.If the owner doesn't owe any money on the property, they may be more open to owner finance because they don't NEED the money from the sale to satisfy a lien on the property. They may be content to just be rid of it and have some passive income.

Albert Melo · Answer

thanks for the tip Steven Picker Where would you usually find deals that the owner offers financing?