All Forum Posts by: Jeff Ronningen

@Adriane Boggs. I don’t know the stats but a large % of tenants on a 12 month lease don’t just move out after 12 months. So it’s unlikely you’d be hit with them all going vacant at same time. You’re also assuming you can rent them all at the same time. Don’t worry about that yet, you’ve got the cart before the horse. Advertise them, do showings, screen tenants. Once someone’s ready to sign ask if they’d consider 18 months. Offer $250 off first month’s rent instead of discounting $25/month. You’ll be glad you did if you extend or go MTM. It’s not ideal to try to rent in Nov or Dec with the holidays, but it’s not ideal for tenants. People don’t want to move during winter and holidays.

@Michael J. You might try reducing the security deposit but don’t cave on the other requirements.

@Franklin Braden Garrett. If you’re not resourceful enough to determine an estimated interest rate to analyze rental properties, you might not be cut out for real estate investing. The interest rate and other stuff you refer to is out there, you need to make the effort to do the research and educate yourself. A successful entrepreneur, and real estate investors are entrepreneurs, is willing to invest the time and effort to identify opportunities and unlock value. This often requires doing things which many people are unwilling to do, which is why many people are not wired to be entrepreneurs. You may like the idea of being an entrepreneur but are you willing to do what it takes?

@Daniel Levin. The fact that 1160 per month is what stands between you and foreclosure or having utilities shut off is a big red flag. I assume before you bought this property you were paying something similar for rent, how did you afford it then?

Hopefully you’ve learned a lesson about having reserves and analyzing cash flow. But before that you need to stabilize this property if you’re going to keep it. Stop spending, sell stuff, borrow if you must. Tough it out.

Let me explain about going backwards.  Buying investment property as an owner occupant provides superior lending terms such as lower down payment.  You said you're approved for a 3% down loan versus if you purchased non-owner occupied you'd be looking at 20% down.  This is because of risk to the lender.  If times get tough will you make the mortgage payment on your residence before you make the payment on your investment property?  People claim they will occupy to get the better loan terms, but sometimes they never do. The benefits of occupancy have been abused and lenders have cracked down on this.  

Let's say you own a single family home and you're married with two young children.  Then let's say you try to get a loan on a 4 unit property as an owner occupant.  This is a red flag to the lender.  They're going to be skeptical that you'll move your family into that 4 unit.  That's a more clear example of going backwards.  In this case buying the single family home eliminates the possibility of house hacking a multifamily.  So find a lender who knows what they're doing, tell them your plan is to acquire more than one property over time as an owner occupant, and let them coach you on how to do it in such a way you don't disqualify yourself.

As far as hoarding cash, yes...absolutely.  Why put down 5% on the first property when you're approved for 3?  Save that.  Your monthly cash flow, save that.  What you would have paid for rent, save that.  Have a fund ready for repairs and vacancies.  Have the cash ready to buy the next one after you meet the occupancy requirement.

I should have said for cash out refi you can probably only borrow 70%.  In 1-2 years with a 30 year amortization you're only going to pay off 1.5-3% of your loan.  That may not even cover closing costs of a cash out refi.  Even if you add 20% value to the property in that short time you haven't built enough equity to get anything from a cash out refi.  That's why you need to hoard cash and save up the down payment for the next one.

Figure out the minimum occupancy requirement, it may be one year. I think you can purchase a property having up to 4 units with the loan you describe. Spend as little as possible on improvements and don’t pay extra on principal. Hoard cash. After minimum occupancy period buy another one as owner occupant. 

Be careful about going backwards or you may have problems with underwriting. By backwards I mean don’t buy a 3 unit first then try to buy a 4 unit for the second. For the second you can’t go backwards on cost/value, number of units, square footage of the unit you’ll occupy, quality of neighborhood, etc.

Think about this before you buy the first. If you’re going to accumulate multiple properties by purchasing as an owner occupant you need to be strategic about it. You also don’t need to refi, that’s costly and you won’t build enough equity fast enough.

@Sebastian Roy. Depending on the lender, the terms of the loan, and your qualifications as a borrower you may be able to borrow 75-80% of the appraised value. A cash out refi on an investment property is risky for the lender so they’ll be conservative. Don’t be surprised if the appraisal comes in low.

You haven’t said how you’re going to create enough equity to make the refi worthwhile. If you’re going to purchase with 20-25% down with 25 year amortization it will probably take quite a few years for the combo of appreciation and paying down the loan to make the refi worthwhile. And you can’t necessarily count on appreciation.

Unless you have a very solid plan to create value quickly, this may not be the way to get your down payment for the next property.

@Scott Passman. As you state there is much to disagree with in this article. No mention of government's role in the financialization of real estate with FNMA and FHA. No mention of 125% LTV and no income verification loans being offered and packaged as investment-grade investments leading up to 2008 and government's oversight failures in this area (can you say Barney Frank?). No mention that corporate interests coming into the real estate market as buyers when prices are depressed helps owners and helps prevent values from falling further. No mention of government's role in restricting development of additional housing units increasing scarcity in high end markets. No mention of sound personal financial practices, such as putting down 20% and having an emergency fund. No historical perspective that prior to WWII you had to put down 20% and amortize over 5 to 10 years, that the 30 year mortgage is a more recent phenomenon and not a sound plan for many people. Stick to reading books and writing articles professor, you might not be cut out for actually jumping into the arena to live or die.

@Nathan G. Just because a person can produce an ID, such as a driver’s license or social security number, doesn’t mean they’re in the country legally. This type of identification can be acquired quickly and relatively cheaply by someone in the country without legal status.

However I agree that identification should be required as part of screening for every potential tenant.

@Zachary Morgan. Unless there's some emotional attachment to the house which prevents you from selling, get a realtor to estimate the value of selling as is and also ask their opinion on maximizing return. All other options should be benchmarked against this and ARV estimated before spending anything. This could be a money pit. If "inheriting" the house requires that you keep and repair it, that's another matter and it's not really a REI question.