Newbie Analysis

[Amy E.]

Hi,

I've wanted to try to buy a SFR in my local area for awhile now. Unfortunately, I can't meet the 2% rule in the average housing price area. I finally realized I needed to go to the lower middle class area (still decent, nice neighborhoods) and found one that ALMOST meets it. I feel like this is the closest I will get to the 2% rule, as I've been watching for awhile now (about a year) and nothing better has ever come up.

Asking Price = $33,000

Rent = $850/month

Repairs = $15,000 (should be less, but wanted to be conservative)

Taxes = $600/year (yup, that's it)

Insurance = $450/year (basic quote)

Flood Insurance = $500/year (estimate, have not got firm quote)

Last sale price = $94,000 (2006, note: the "bubble" did not have big impact)

My "rule" is 1.7%, but I'm hoping to negotiate the price down to make it to 1.9%

My question is mainly about financing. Here are what I see as my options:

1) Conventional Loan. I have not checked with big bank chains, but my local credit union will lend me 80% of the value @ 9% for 12 years to my LLC. They will also give me a "rehab loan" for six months at which point I have to convert to the conventional loan above. I'd owe $8,000 cash in this scenario, plus whatever closing costs. Mortgage = $437/month

2) Borrow from my 401k. I have way too much in my 401k right now. I know you can't ever have "too much", but I ran the numbers and I could take out a $50k loan from my 401k and it will not impact my retirement goals. If I take the money from my 401k, I have to pay myself back at 2.25% over 5 years. The interest goes back into my 401k as my own money (I'm paying myself the interest) There is a $50 (yup, just $50) to get this, no closing costs. I could buy the property outright in this scenario and use the cashflow to pay myself back. Monthly payment = $847.

3) Peer to Peer Loan. I could use Prosper or Lending Club, get a $35,000 loan @ 8% for 5 years. Monthly payment = $709.

4) Combination of 1, 2, and 3 above.

As I understand it, I will not qualify for a 203k loan (they stopped giving them to investors) or a Small Business Loan (they'll lend you money for real estate, but only if you need it for an office). I don't want to hold the property in my personal name b/c of liability, so I can't get a conventional mortgage that way, either.

My spouse thinks #2 is best because we will be "paying ourselves" the interest back and the interest to the business is much cheaper. I disagree b/c all the money for the first five years will be going towards paying off the loan; then we're left with paying operating costs (maintenance, insurance, taxes, etc.) out of pocket. I lean towards 1 or even 3.

So, two main questions:

1) Can someone help me evaluate the cost benefits of the above scenario? I'm not quite sure how to do the analysis.

2) Anyone know of other ways to finance or better rates from alternate lenders? I've been searching the boards but there is a lot I don't understand.....