Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
100% Investment Property Financing
Old 02-24-2014, 06:42 AM   #1
Dryer sheet aficionado
 
Join Date: Dec 2011
Posts: 42
100% Investment Property Financing

I'm really getting the bug to start my rental property journey. My wife and I have been paying off debts with every extra dollar we have and I haven't set aside anything substantial for an investment property. Do I have any options? I'd imagine I'd pay higher rates, perhaps incur additional fees, and this would hurt monthly cash flow. However, I also want to get in it for the long haul, not just for the monthly cash flow right now. Do I have any financing options?
__________________

__________________
cscott711 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-24-2014, 08:15 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,396
Your best option is to be more patient.

Also see my second signature line.
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 02-24-2014, 08:48 AM   #3
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 660
Wow, has our collective memory of the housing bubble faded so much that investors are already getting impatient to purchase no money down rental properties? Let me remind you that these highly leveraged deals can go bad just as easily as they can make money.

As a practical alternative to leveraging yourself to the hilt, I suggest that you look into making a modest investment in REITs. Vanguard's REIT index fund, VGSIX, has a $3,000 minimum investment and would be a good way to get started in real estate. If real estate really does continue its recovery, you will see profits in VGSIX which, along with additional savings, will eventually grow large enough to become a down payment on your first rental.

If you don't have $3,000, then I would have to second pb4uski's advice to be more patient. If you have essentially no savings at all, not only would you be 100% leveraged with a rental property, but you would also not have any cushion at all for needed repairs or to pay your mortgage in case of an unexpected vacancy.
__________________
karluk is offline   Reply With Quote
Old 02-24-2014, 10:47 AM   #4
Recycles dryer sheets
 
Join Date: May 2011
Location: Twin Cities
Posts: 434
Most traditional lenders are going to require 20-25% down for an investor loan.

Therefore, you'd need to go a non-traditional route - hard money lender who is going to charge at least 5-10% more than a traditional lender. Other option could be to try to find seller financing but most are going to want at least 10% down. Seeing as most investors are paying all cash you may have a hard time getting offers accepted.

Another option you might think about is wholesaling. It's not as good an option as it was a few years back but it could get you started with making money in real estate without any funds and can build skills at birddogging deals. Maybe listen to this recent BiggerPockets podcast - BP Podcast 058: Flipping and Wholesaling Homes While Working Full Time with Justin Silverio
__________________
Fishingmn is offline   Reply With Quote
Old 02-24-2014, 04:07 PM   #5
Full time employment: Posting here.
 
Join Date: Mar 2012
Location: seattle
Posts: 643
Quote:
Originally Posted by Fishingmn View Post
Most traditional lenders are going to require 20-25% down for an investor loan.

Therefore, you'd need to go a non-traditional route - hard money lender who is going to charge at least 5-10% more than a traditional lender. Other option could be to try to find seller financing but most are going to want at least 10% down. Seeing as most investors are paying all cash you may have a hard time getting offers accepted.

Another option you might think about is wholesaling. It's not as good an option as it was a few years back but it could get you started with making money in real estate without any funds and can build skills at birddogging deals. Maybe listen to this recent BiggerPockets podcast - BP Podcast 058: Flipping and Wholesaling Homes While Working Full Time with Justin Silverio
Shouldn't that podcast title say: "... while working TWO full time jobs..."

Lots of lenders for non-owner-occupied want a minimum of 30% down. But go ask a few, that will drive the reality home for you and show you what is necessary to get off the ground.
__________________
bld999 is offline   Reply With Quote
Old 02-24-2014, 04:21 PM   #6
Recycles dryer sheets
 
Join Date: Apr 2010
Location: Silicon Valley
Posts: 198
Option I use is LOC on residence which is adjustable, then refinance in 6 months with its own fixed rate loan.

I would be very, very hesitant to buy my first rental with 100% leverage. IMHO this is high risk as e.g. one roof replacement can wipe out a LOT of months of cashflow.

How about a tenants in common ownership with a partner - preferable one who has purchased successful cashflowing properties... at least you would be splitting the risk and perhaps have an additional source of emergency funds
__________________
SVHoper is offline   Reply With Quote
Old 02-24-2014, 05:36 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
I think the only practical way to do this is to do a refi or HELOC on your existing home. I use on Home Equity loan on my house to finance a couple of my Vegas properties, because it was much cheaper than mortgage for a rental property.

My guess is you don't have the ability to that.

A few years ago there were probably a few real estate markets where you could tap into an unconventional (e.g hard money lending) lending at say 12%, buy a property and rent it to be cash flow positive. I don't believe you can do that in any market in the country today.
__________________
clifp is offline   Reply With Quote
Old 02-24-2014, 08:56 PM   #8
Dryer sheet aficionado
 
Join Date: Dec 2011
Posts: 42
Thanks for the responses everyone. Lot's to "chew" on. I'd want to start small anyways, so maybe focusing on building up a down payment over the next 12-18 months is the way to go? Right now, I dump everything I can into my 401k. That doesn't offer much flexibility, so I'm considering lowering the amount invested in there to gain the flexibility of investing it where I'd like.
__________________
cscott711 is offline   Reply With Quote
Old 02-24-2014, 10:00 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
We do a bit of hard money lending and like the borrower to have a 20% stake in the property. That said, we just sent $80k to a title company to 100% cover the purchase of an old triplex for some flippers we have done probably 6 deals with over the years.

They buy places so cheap that there is instant equity at purchase. They also set up automatic payments so their payment gets to us the same day every month. They also send us a small check (a fraction of a percent) as an unasked for bonus with each new deal. It doesn't make logical sense, when we sometimes charge a couple points as a fee with other loans, but that unasked for couple hundred bucks makes us view them favorably, and it does seem to work for them...
__________________
calmloki is offline   Reply With Quote
Old 02-24-2014, 10:12 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
cscott, help me out here: what is so special/enticing about rental property vs. other investments?
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 02-25-2014, 06:45 AM   #11
Dryer sheet aficionado
 
Join Date: Dec 2011
Posts: 42
Quote:
Originally Posted by brewer12345 View Post
cscott, help me out here: what is so special/enticing about rental property vs. other investments?
I like the power of leverage and I think it is great diversification compared to the market. I'm always looking to find a different type of investment, so if there is something that works for you I'd be happy to hear about it. I ran some numbers below. If these seem a far cry from reality, then let me know as I admit I am far from a rocket scientist.

Assume $100,000 cash for both scenarios.

First, invest it in the market for 30 years at 7% and 8% (compounded annually). 7% being the historical average return and 8% in case you're above the norm.

$100,000 @ 7% over 30 years is $761,225
$100,000 @ 8% over 30 years is $1,006,265


Second, invest in five $100,000 rental properties with 20% down or $20,000 each. Assume 6% cash on cash return, which is $100/month net cash flow or $1,200/year per unit. Calculated with 4% average annual appreciation based on historical data. 3% appreciation also calculated in case future trends are below past trends.

$1,200 cash flow per year for five units over 30 years is $180,000.

$100,000 annually appreciated at 3% over 30 years is $242,726 x 5 is $1,213,630. Add $180,000 cash flow for total of $1,393,630.

$100,000 annually appreciated at 4% over 30 years is $324,339 x 5 is $1,621,695. Add $180,000 cash flow for total of $1,801,695.
__________________
cscott711 is offline   Reply With Quote
Old 02-25-2014, 09:11 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
We have rental property - in fact that has been our primary source of income for decades - and it worked out really well for us. Two things though - that 3 or 4% appreciation isn't guaranteed; and running rentals isn't without a certain amount of labor and mental/emotional stress. If you suggest that your properties would be managed by a company that will also have all the problems professionally repaired then I'll suggest that your profit just disappeared.

We sold a 5-plex late last year and are on track to sell a 7 unit (knock wood) in the next month. The funny thing is that we are also looking at a partnership and buying more property with the partner running that rental property. I think my Dad used to call that "willful stupidity".
__________________
calmloki is offline   Reply With Quote
Old 02-25-2014, 09:19 AM   #13
Dryer sheet aficionado
 
Join Date: Dec 2011
Posts: 42
Quote:
Originally Posted by calmloki View Post
We have rental property - in fact that has been our primary source of income for decades - and it worked out really well for us. Two things though - that 3 or 4% appreciation isn't guaranteed; and running rentals isn't without a certain amount of labor and mental/emotional stress. If you suggest that your properties would be managed by a company that will also have all the problems professionally repaired then I'll suggest that your profit just disappeared.

We sold a 5-plex late last year and are on track to sell a 7 unit (knock wood) in the next month. The funny thing is that we are also looking at a partnership and buying more property with the partner running that rental property. I think my Dad used to call that "willful stupidity".
How did you get into the business? What's your strategy? I don't believe anything is guaranteed regardless of the type of investment. All you can do is limit your risk by using sound strategy, bountiful research, and continuous education. I don't believe it is a hands off, stress free endeavor by any means. Neither is my 401k. I actively manage and have been rewarded for it.

I have quite a few books, have attended seminars, and frequently peruse the internet looking for more information about rentals. I have heard 100's of horror stories, heard all the failures, and been warned it's a hard road to head down. I'm sure you have many of your own experiences. So, why do you still do it?
__________________
cscott711 is offline   Reply With Quote
Old 02-25-2014, 10:09 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
I think your rental numbers are very optimistic, do not take vastly higher risk into account and value your many hours of labor at zero dollars. On the equity side of things you forgot dividends.

I have at times in my career been an investment professional and regularly crunch numbers on many asset classes. I could never make real estate work numbers wise except during the crash. Stocks and junk bonds were crazily on sale at the same time, so I did not bother with property. YMMV
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 02-25-2014, 10:19 AM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
Got into the business because I like different style buildings and that, plus an acquisitive nature and the eternal hope that I've found a bargain, led me to have places that needed a lot of work to keep them from melting into the grounds. On our first rental as my gal and I were showing off our abilities to one another tax time rolled around and we decided to write off the expenses as "rental expense". After we completed that house we had to rent it out, 'cause that's what we had told the IRS we were going to do. She also had a house that she let her ex stay in till his "rent" exhausted his share of the equity, so then we had two rentals. Found another cheap house as someone was looking for a rental, so we bought that and plugged in the renter, and now our set had become a collection and we were off to the races.

Our "strategy" (quotes because we didn't have anything so grand) was to pay off the 9% or greater mortgage debt as fast as possible - now there is your guaranteed return. At the same time we kept finding deals that we knew we could make work, and sure enough, they made work, which we did. With due respect, actively managing your 401k does not equal actively managing rental property, which come with people problems as well as plumbing.

Why do we still do it? Probably a combination of old dog and well trod path; a love of "the deal" and a feeling that not doing deals equals not living or being superfluous; and most important, my gal is a problem solver and once she has her teeth in something she does not quit - figure I might as well go along for the ride.

Sinatra had our strategy:

__________________
calmloki is offline   Reply With Quote
Old 02-25-2014, 10:33 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,396
Funny/ironic. cscott711 is keen to get into rentals while Palimpsest is underwater and looking for a clean exit.

Anxious in North Carolina

My dad had investment properties and dumped all the residential properties as he was tired of dealing with tenants. He kept one commercial property that has been continually leased to a high quality corporate tenant and has worked out great. BIL has a residential rental that has worked out ok for him.

I just found the idea of residential real estate too tiring - finding good quality tenants, getting rid of the bad tenants, calls for problems - not for me. Easier to buy a REIT.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 02-25-2014, 10:47 AM   #17
Thinks s/he gets paid by the post
RetireAge50's Avatar
 
Join Date: Aug 2013
Posts: 1,118
My only advice if you want to invest in real estate do not do a partnership. If you finance the deal you are in a partnership with the bank and you probably will be personally liable for the downside. So you might get rich but you might go bankrupt.
__________________
RetireAge50 is offline   Reply With Quote
Old 02-25-2014, 12:08 PM   #18
Thinks s/he gets paid by the post
Senator's Avatar
 
Join Date: Feb 2014
Location: Eagan, MN
Posts: 3,040
I own several rentals, multifamily. You will need 25 - 30% down. Gone are the days of 0% down. Maybe an owner occupied duplex of 4-plex might be less down.

Make sure you are cash flow positive, from day 1. If not, avoid it. Assume 50% of rent goes to expenses, what is left pays the mortgage. What is left after that is cash flow and ROI.

I could give a 8-hour seminar on investment properties and tenant selection, but it's too much to type...
__________________
Senator is offline   Reply With Quote
Old 02-25-2014, 12:33 PM   #19
Recycles dryer sheets
 
Join Date: May 2011
Location: Twin Cities
Posts: 434
Quote:
Originally Posted by cscott711 View Post
I have quite a few books, have attended seminars, and frequently peruse the internet looking for more information about rentals. I have heard 100's of horror stories, heard all the failures, and been warned it's a hard road to head down. I'm sure you have many of your own experiences. So, why do you still do it?
I own 10 rentals - 100% positive story here -

- Bought them over past 4 years
- I'm Realtor so easy to analyze/find deals and get the buyer side commission on purchases
- Manage them myself - I'm handy. I maybe get 1 call every 2 months. Quite easy. Have team of professionals (plumbing/HVAC/painting) for things I don't do
- Grand total of 1 late payment and he paid the $50 late fee 2 days later (told me about it ahead of time)
- Biggest issue is finding new tenants on move outs but that's not too stressful. Maybe 3-10 showings on average. I keep rents competitive and find new ones fast with very little in the way of vacancy. I use a strict review/background check process that has worked well.
- I let my tenants break their lease if they use me to buy a house. Have had 4 tenant transactions which have brought in lots of extra in the way of commissions
- My units average a 9.5% cash return (no loans) and that's with conservative numbers for vacancy/repairs which I've been under every year
- Figure they've appreciated about 25% on average
- Rentals are a great hedge against inflation as rents usually rise with inflation

I'd buy more if I could but prices are up, inventory down and there are a lot more investors in my market.
__________________
Fishingmn is offline   Reply With Quote
Old 02-25-2014, 02:11 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
Quote:
Originally Posted by cscott711 View Post


Second, invest in five $100,000 rental properties with 20% down or $20,000 each. Assume 6% cash on cash return, which is $100/month net cash flow or $1,200/year per unit. Calculated with 4% average annual appreciation based on historical data. 3% appreciation also calculated in case future trends are below past trends.

$1,200 cash flow per year for five units over 30 years is $180,000.

$100,000 annually appreciated at 3% over 30 years is $242,726 x 5 is $1,213,630. Add $180,000 cash flow for total of $1,393,630.

$100,000 annually appreciated at 4% over 30 years is $324,339 x 5 is $1,621,695. Add $180,000 cash flow for total of $1,801,695.
I bought 2 houses, a condo, and 4 Plex in Vegas 2010-2012. On paper the 4 PLex looked like the best investment, but in practice it was a nightmare, finding tenant who actually paid rent, so I sold it a small loss cause price in Vegas have skyrocketed the last few years The other 3 have all had issues but have all appreciated and are currently rented, at least today.

First your profit is highly dependent on your cost of funds. The $100/month profit on your properties disappears entirely if the interest rate rises 1.5%. There is a big difference between the 4% I'm paying, the 6-7% a typical non owner occupied loan is going and a 12% hard money loan. My understanding is now days banks want 25-30% down for rentals.

Second there is even larger difference in profit from a absentee landlord like myself and hands on property manager like Calmloki or FishingNM have.
FishingNM, gets a 3% discount being a realtor. I'd be willing to bet that both Calmloki and FishingNM with more experience and being more hands on get better deals say another 3% lower price.

My property manager takes 8% (which is lower than more typical 10%)
It cost me 1 month rent to find a new tenant (and another 1-3 month of no rent while it is vacant), if I managed them myself it would be only 2 weeks so 2% lower income/year.
For logistical reasons I am stuck with my property managers list of approved repair guys other than move out clean up, where I have a team of inexpensive folks. I bet I pay 30% more than Calmloki or FishingNM for repairs so another 5% a year less income.
All in all I figure I get for a property that rents for a $1,000 being absentee cost me $150/month

I should add even being absentee doesn't mean no hassle. I still spend an inordinate amount of time, responding to HOA violations, tenant complaints, and taxes are a pain. Real estate is about 10% of my net worth but easily 1/3 of the time I spend on investments.

Finally, there is no guarantee that RE will go up or that you can increase rents. (I finally got my first rent increase this year of 3%) As much as complain, my bitches are nothing compared to the folks before me. Each property I bought the previous owner paid three to four times more, and they all lost every dime they put in and their credit ratings.

On the other hand, real estate certainly can be very profitable. There is only so much you can learn about being a landlord, from books, seminars, forum etc. But be very cautious before diving in.
__________________

__________________
clifp is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Rental property financing question se012101 FIRE and Money 3 04-19-2009 12:59 PM
Rental Property Financing semi-fired FIRE and Money 9 06-27-2008 05:41 PM
Raw Land Financing bbuzzard FIRE and Money 15 11-29-2006 11:06 AM
A little too creative financing? farmerEd Other topics 0 03-20-2006 04:34 PM
Financing a car/car buying advice usc_et Young Dreamers 14 11-01-2005 11:59 AM

 

 
All times are GMT -6. The time now is 03:57 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.