How much of funds to use with private investor

[Alexander Zurn]

Hello - I have a bit of a spin on the age old question: To use all of your savings on your first property or not.

I have 10k I have saved in 6 months to put towards a property.

I have planned to use 5k of my own funds and a private money lender for the remaining 14k at 5% over 10 years.

My question is this: Should I use all 10k of my own funds and only borrow 9k (at 5%) so I don't have to pay as much interest to the private money lender as I would on the 14k?

My thinking has always been that if I have 10k to put 5k into one unit and then continue to save my net monthly cash flow from this unit (see below) + job savings on top of the other 5k I have left to buy a 2nd property by the beginning of summer '17.

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Property:

Listed at $105,000, PP: $95,000 (plus 4k seller credit), Rent history: $1,100 past 3 years. 20% down (19k) puts the loan amount at $76,000.

Monthly Income (rent): $1,100

Monthly expenses (including taxes, insurance, HOA, P&I): $810.15

Positive Cash Flow: $289.85

Monthly Private Money Lender expense: $148

Net Monthly Cash Flow: $141.85 (to go towards next unit)

Key words: rhode island, providence, savings, down payment, private money

[Anthony Thompson]

I would wait until you can afford the full down payment for three reasons.

First, in the application process of most residential mortgages they are going to scrutinize your finances, paying particular attention to where you get the money for the down payment.

They will be looking for exactly the situation you're describing, where you're getting a loan from someone else because you can't pay the down payment yourself, and unless the source of funds is willing to give you a "gift letter" saying it's not a loan (and you sign something saying the same thing), they will turn you down for the loan.

And as I wrote in another BP thread today, if there are Federal funds involved (almost always the case with mortgages as I understand it), I believe it's a felony to lie on those forms. Serious stuff, mortgage fraud - people can and have gone to jail for it, even in RI.

Second, I almost always recommend against a new investor buying a condo for their first investment property, unless s/he already has an existing relationship to that particular condominium association/complex (owning another unit in there, being on the board, etc.).

There are just too many issues that seem to come up with other condo units, the condo association rules, ratio of owners to renters, condo association board politics, special assessments coming down the road, how professionally (or unprofessionally) the condo board manages the building and its finances, and - importantly - the fact that you have no control over the HOA fees but are required to pay them.

New investors are almost by definition unable to grasp the complexities of the condo association they would be joining and unable to understand that they are tying their financial fate to a group of people who may or may not be managing the property and its finances well. Also if a number of other condos stop paying their fees (as happened 6-8 years ago), it will be up to the remaining condo owners to make up the difference.

In many ways condos have all the burdens of owning a house but all the limitations of an apartment. Except for certain limited circumstances I usually recommend against them, at least for long term buy and hold. (Non-beginner investors can do OK with condos on a short-term basis at the right point in the market cycle but care must be taken not to be without a chair when the music stops.)

Third, in this particular case the #s are not only tight, by my calculations they'd actually put you into slightly negative cash flow.

Using the same format as the original, my numbers are:

Property:

• Purchase price: $95,000
• Down payment: $19,000
• Private $ down payment loan: $14,000
• Real down payment: $5,000
• Monthly income: $1,100
• Yearly income: $13,200
• Operating expenses using the "50% rule": ($6,600)
• this would include taxes, insurance and HOA fee
• Yearly mortgage pmts (main mortgage): ($4,896)
• (76,000 loan for 30 years at 5%)
• Yearly private loan pmts: ($1,782)
• (14,000 loan for 10 years at 5%)
• Yearly free cash flow: ($78)

For all the reasons above, I would recommend you continue saving until you have the entire down payment. Then I would look for a 2F located within 15 minutes of where you work, buy that (possibly living in one side if you need to), learn some property management from that, then after some digestion time move on to your next deal.