100% Investment Property Financing

[cscott711]

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?

 

[pb4uski]

Your best option is to be more patient.

Also see my second signature line.

 

[karluk]

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.

 

[Fishingmn]

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

 

[bld999]

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.

 

[SVHoper]

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

 

[clifp]

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.

 

[cscott711]

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.

 

[calmloki]

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...

 

[brewer12345]

cscott, help me out here: what is so special/enticing about rental property vs. other investments?

 

[cscott711]

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.

 

[calmloki]

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".

 

[cscott711]

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?

 

[brewer12345]

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

 

[calmloki]

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:

Frank SINATRA - High Hopes - YouTube

 

[pb4uski]

Funny/ironic. cscott711 is keen to get into rentals while Palimpsest is underwater and looking for a clean exit.

http://www.early-retirement.org/forums/f26/anxious-in-north-carolina-70778.html#post1419934

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.

 

[RetireAge50]

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.

 

[Senator]

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...

 

[Fishingmn]

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.

 

[clifp]

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.

 

[Fishingmn]

Hey clifp - I am fishing in Minnesota - not New Mexico

A couple clarifications - typical buyer side commission here is 2.7% and then I split it with my broker so probably about a 2% break but then I pay taxes on it.

My primary maintenance costs are actually appliances and HVAC repairs so I'm not sure your costs are that different. All of my units are townhouses (& 2 condo's) which I specifically bought to avoid any outside maintenance issues.

Also, the 50% rule already assumes that you are paying for property management. That said, I'm sure I do much better than farming it out since I am much more on top of things. Biggest difference (besides not paying 8-10%) is vacancy. I've probably had a grand total of 2 months vacancy total across 10 units in the past 4 years. I don't typically raise rents on current tenants and I have very little turnover that way which avoids vacancy and the costs of refreshing unit.

 

[kgtest]

I had a college girl move out and she left her cat behind. These are the tenants/people you will meet owning a rental. I call it the fringe of society.
Nobody has respect for stuff they don't personally own in my experiences landlording. Its high stress and low reward.

If you can get a 15yr loan w/10-20% down and pay that sucker off in 10years, the next 10 years you will then finally begin to get a nice ROI. But you will be dumping your own cash into it all along.

 

[kgtest]

..

 

[pb4uski]

I had a college girl move out and she left her cat behind. These are the tenants/people you will meet owning a rental. I call it the fringe of society.
Nobody has respect for stuff they don't personally own in my experiences landlording. Its high stress and low reward. ....

emphasis added

Actually, from what I have experienced they don't have much respect for stuff they own either.

 

[SVHoper]

... 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.

Hi,

Math looks fine (though I didn't calculate). We know many folks love real estate and have got very good returns from real estate... while many have not. Leverage just makes it better... or worse.

IMHO the word assume should have a red flag, as anyone who suffered $$$ from real estate probably contravened one of those little assumptions. You can hardly argue with cashflow and appreciation.

The skill and trap? is in the execution:
Finance and find 5 properties that gives $100/month net (while paying for $400k mortgage and maintenance) and give 3% or 4% appreciation.

When you do that more detailed math, don't forget to allocate a decent chunk of rent to expenses outside the mortgage (some advise as high as 50%). This will provide safety in your estimate of $100/month.

Another appreciation warning to add to CalmLoki's. I find the appreciation impossible to quantify - except in hindsight, I am pretty good at that! I wish I had been like Fishingmn and bought 10 over the last 4 years I am seeing that places which were outstanding buys in 2009 or OK even in early 2012 are a lot worse now.

IMHO 20% deposit and some cash buffer sound like an improved (lower risk) plan for a first time purchase, than personal debt and 100% financing.

Good Luck