Newb with No funds but great Credit

[Sandro Bianco]

Hello All! This is my first post on the Bigger Pockets forums so i'm very excited! To give you a little background on myself, I am 30 years old and hope to soon be a first home buyer. I have no savings but i have a 401k that I know I can withdraw 10k for a first home purchase. I love the idea of buying a 3-4 multiplex, living in one unit and renting out the other units but since I live in NJ and I only make 55k/annually I have no idea how i would accomplish this goal of mine without getting a better job. My credit score is around 800 which is awesome but I was wondering how the pros would recommend me starting off seeing in the next year I will have to move out. Another side note is that I am considering joining the Army Reserve to help pay off my 30k of student loans and also take advantage of their VA loans and I just finished getting my Real Estate License. Any advice will be greatly appreciated and I am curious to hear what strategies you guys recommend for some one that isn't making much.

[Cindy Larsen]

As a first time home buyer, you are in a great position to buy, because there are programs that will allow you to get a mortgage and put down only a 3% or 5% downpayment on the property. I believe this same low downpayment will be allowed if you buy a property with a partner.

So, a $300,000 duplex, for example, would only require a $9,000 or $15,000        downpayment. If you don’t want to wait to save the downpayment, a partner with downpayment $ is pretty much your only option to buy soon. 

If I were you, I’d do the following: 

Find an experienced investor partner, form an LLC with an operating agreement that spells out who owns what percentage of the property. This might be 50/50 or 60/40 with your partner providing the downpayment and experience, and you providing the (hopefully) increased ROI due to the low downpayment and from possibly decreased interest rate resulting from your great credit, and certainly decreased interest rate from owner occupying the property.

Can you find a property that cash flows with such a low downpayment?Run the rental property calculator on available properties to find out. Low downpayment = higher mortgage payment = less cash flow.The BP calculator is a great tool, but beware: you have to put valid info in to get valid info out of the calculator. So do your research on what those numbers you input should be, and be conservative on what you can rent the property for. Are there maintenance/repair costs that you will need to pay for up front? Who is contributing those funds? No? Are you sure?Who is paying for the home inspection, the appraisal, and the other costs of the buying process? Are their capex costs that will need to be paid for in the near term before the property has built up a capex fund?No? Then where will that money come from? So, after researching everything and identifying all upfront costs and all ongoing expenses (vacancy, maintenance/repairs, capex, property management) if it cash flows, then buy it.

If you live in the property, you would pay the LLC the same rent as any other tenant. The LLC might pay you for managing the property, if you were qualified. So learn how to manage properties. Start with Brandon Turners Book on Managing Rental Properties. Start with a duplex. Move up to more units when you have more experience.

Live in each side of the duplex for two years, doing maintence/repair on the side you are not living in, to be able to deduct your percentage of the maintenance/repair costs from your percentage of the income. Plan an exit strategy to sell the duplex in the 4-5 year time frame, so you get the capital gains exclusion on your entire capital gain (since you lived in each half of the property for two years of the five years before selling).

I'd also have both partners invest an equal amount of their profits from the LLC each year in paying down the mortgage, resulting in building more equity sooner. When you sell, your equity (less your half of the sales expenses) becomes the downpayment on your next property.

Anyway, that’s what I’d do.

Also the people recommending that you take control of your finances, reduce expenses, and start saving are right. One of the best ways to save is to start by paying off any debt you have. This will free up the money you were spending on those debt payments (mostly interest) so you can save it. A 401k loan is not bad, but be aware that if you change jobs, you will be required to immediately pay off the loan.  This can be bad if you just lost your job because the company downsized or something. on the good side, if you use the 401k loan to pay off a small debt, and then pay off the 401k loan, then repeat, you are paying interest to your retirement plan, instead of to a bank. And it is at an interest rate that you pick, which will immediately reduce your required payments vs your previous debt payments. So keep paying the same amount you were before, and the 401k loan is paid off quickly.

Work smart, and do well. Good luck.

CJ