How would you start?

Question

Hi BP Family, I originally started looking at out of state properties but have recently been looking in my area in DC/ Northern Virginia. At first I was not interested in looking in the Nova area because of the high prices -- it is darn expensive here, but I am trying to keep an open mind as an open mind is required on this real estate adventure. However, I am way too all-over the place right now. I've thought about a multifamily househack, but multifamilies are scarce in NOVA and I dont know why. So then this leaves me with expensive single families here. The astronomical prices are scary. Then I thought about acquiring a piece of land and building a multifamily on it, but I think this project level is not for beginners. sigh. Then back to out-of-state multis. Im going in circles. Lets move on. My credit score is 800+, I have a decent paying job with the gov, have extra income from rental properties my parents left me, but downpayment is limited as im paying off a 30K personal loan. What are the odds in getting financing for my first REI project/property? And knowing my financial stats, does it matter starting off in an expensive market like mine or should I look elsewhere, i.e. Columbus OH, Kansas City, etc. I sort of believe that it doesn't matter if one starts in an expensive market or not, what matters is that you know what you're doing. And to add to that, though I'm educating myself, I still dont know what I'm doing. I do, however, want to pull the trigger. I apologize for the long post. And thank you to everyone in advance. Caroline

Dave Ramirez · Answer

I work deals out of state all of the time for good rentals. Some are owner financing so you only need a small down payment. There are some good deals in Jacksonville right now. I have cash rent properties in Johnstown that net $500 a door because we own them outright. Lots of duplexes and triplexes in this area as well. Have you considered using a portion of your government retirement savings to buy properties? The worst thing you can do is nothing. You'll only get better if you fail.

Scott Holmes · Answer

@Caroline S. FWIW I'm in a similar situation-- was living in Arlington, now in Ashburn... my plan is to buy a value-add SFR in Ashburn (via VA Construction Loan if I can find a lender who doesn't think I'm making it up), then sell or rent out in a couple years. Looking for multi investment properties further south where the numbers make a little more sense.

Bradley Hardin · Answer

As an architect, another house hack that rarely gets discussed is taking a larger home and subdividing it into 2 or more separate units. While you need to check with your local building and/or permitting agency (which isn't as scary as it sounds) as to the feasibility of doing this on a particular property, it may make sense in an area where the density has increased or where the demand has shifted to smaller units with good locations like DC. Just some food for thought.

Rama Williams · Answer

Hi Caroline, I am in the same boat as you, I'm a young real estate professional in the area, and I will be purchasing my first multifamily in Arlington, which I will be living in. I agree prices are very high, however, the rents are also correspondingly high, and there is never a shortage of tenants in our area, which another bonus. I think there are situations that could be made to generate a positive cash flow, if the right deal is made. I'm currently working on building a list of all the small multifamily properties (2-4 units) in the Northern Virginia area. I'm doing this by working through MRIS to document all the multifamily properties, both on and off the market, and also literally walking and driving for dollars, and finding properties that have more than one mailbox and more than one utility meter, which is a sure-fire way of seeing if a residential building has separate units. My next step will be to determine the owners, which will prove more difficult, but I am in the process of initiating a direct mail campaign to find interested buyers. As for financing, with an excellent credit score, you should absolutely qualify for an FHA loan, which I intend to go for as well. With an FHA loan there are two advantages: 1) you only have to put 3.5% down, and 2)there is the possibility of folding a 203k construction loan into an older property, which is also covered on the loan, and will allow you to renovate without dipping into your own money. The only catch is that you will need to live in the property for a time. There is always a way to get things done, I think it will just take some creativity, as it's a bit more challenging with the price point out here. Even if you get a duplex, you could at least live for nearly free, and have something you are building up great equity in. I'd love to chat more as I'm going through the same situation, perhaps we could even help each other out. I'm looking to start a bigger pockets group in Northern Virginia focused on small multi-family properties. There is one already in Fairfax, but they meet at 8 AM on Saturdays- yikes :). Good luck!

Manolo D. · Answer

Caroline Somera The basics of expensive markets are you aren't there for cash flow, but you are playing with appreciation. As what I have read, and don't hold me to it, your regular gross income * 40% - recurring payment (car, utility, rent, average of sum of all credit cards over the last few months) = your mortgage. I don't know if the rental cash flow affects this. But on the equity side, many will lend at 80% on high priced markets (maybe 70% if very low rates) but I know more or less you could leverage your rental property's equity against this (in one way or the other). Your 800+ credit score will bump up those lending capacity and lower the rates, but lenders tend to cover their own behind in all cases. Why not go back to a rental in hawaii instead of VA? Since you already have a rental, it's easier to expand their since you already have the network, plus the siblings can help out in case of emergency/best critical decision making. The great thing about high dollar properties are the margins are also large if you'll flip it, not so much for rentals except appreciation, which can defeat most cash flow numbers.

Caroline S. · Answer

@Dave Ramirez Hi Dave, sorry for late reply. I have not checked into BP in a minute..I would def love to learn how to do owner financing deals if you have time to chat. I see that you are in VA as well. I know that I can potentially utilize my TSP and my IRA to purchase rentals, but just haven't done so. I'm really not sure where to start or what kind of capital I'd need to start? i really appreciate you input.

Dan Bernstein · Answer

Using the MLS to find multifamily can be very tricky and unreliable. We use CoStar to analyze the type of property an investor wants to buy and work on the financing piece before offers are submitted. 2-4 units can be found in the tax records and then compiled into a data base, however when these units become available, they are generally sold off market and not listed on the Residential MLS. If they are in the MLS, generally the price is too high for an investor based on income alone. We list 2-4 units on the MLS, but they are sold at a premium. Some investors are willing to buy them on a speculative basis (buy and hold model), knowing that the property will appreciate in the long term, depending on the neighborhood. We actually have a 10 unit off market in Anacostia which generates great cash flow. Most of the deals we see are from our investor network, past clients or cooperating brokers.Your best bet is to meet with a commercial lender, analyze your current holdings with a commercial agent and decide on the best way to proceed. The data in CoStar is incredible and its much easier to find properties and contact owners with off market offers.You also might be better off swapping your current holdings for a building or selling them in a portfolio sale to 1031 them into a higher income producing property. I would need more details as to what your are trying to accomplish long term to give better advise.[Solicitation Removed by Moderator]

Manolo D. · Answer

Hmm, the only way I could think of is, you transfer the rental in an LLC and apply for a 5% conventional loan as primary, with that said, the calculations above still true to your borrowing capacity. 40% of gross income less monthly recurring. Ever heard of I own nothing but control everything? That's what you do on your rentals. Hard money is typically for flips/rehab, but there are programs that do hard money then conventional/long term so you don't have to do turn-overs twice. @Chris Mason might be of help to you. No money down is for wholesalers I believe, not buy and hold, little money such as 5-7% is doable.

Linda S. · Answer

Caroline S.,You don't need to go out of state to find good deals, you just need to get out of nova. Check out the tri-cities area, or Hampton/Newport News/Norfolk, or even places like Lynchburg or Harrisonburg. It's not as rich sounding as talking about investing out of state, but the money will be very similar, if not better, and your taxes will be easier! I'd recommend a place you can at least drive to, so if you ever need to check and verify, not to mention you can form good relationships with contractors.

Russell Brazil · Answer

"Find props and make offers even if I dont have the financing layed out yet? That way Im forced to figure it out and make it work. lol, thats a great strategy."That is definitely not advisable as it is a recipe for you to get sued.