| Financing a Rental Property |
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maresf16
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Location: Woodward, OK
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| Financing a Rental Property |
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I found an exceptional rental property here in town. The asking price is $125k, but I think it'll probably sell for less than that. It has four units and current income on them before any deductions is about $1800. That's a hefty amount and would cover any mortgage you could get on it I would think.
However, I have very little cash to put down on the purchase. It's my understanding that with rental/investment properties mortgage lenders want to see 20-30 percent down. And then they give you higher rates.
Another option I have is to try to line up schedules so that I could move into one of the units. Then I MAAAAAAAAAAAAAAAYBE could get it financed as owner-occupied. Still would be difficult I imagine. My credit score isn't terrible but it isn't great. I don't own a house, I currently rent an apartment. I wouldn't mind living in one of the units it just might be difficult to get it done.
Anybody a financing wiz on this stuff? Can anybody think of any ways I could make this happen with only a few grand in the bank? I don't mind if I don't make a huge amount each month, because then taxes will be easier. However, I am worried about the liability issue because I wouldn't be able to protect the property under any kind of legal LLC or anything for a long time. Also because of financing hassle.
Any advice greatly appreciated.
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Thu Jun 09, 2011 4:11 am |
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littleroc02us
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Honestly as a lender I would be scared to death of someone who doesn't have a good down payment and little cash. Why can't you save the 20% down, it's only 20k...
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Thu Jun 09, 2011 1:11 pm |
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maresf16
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Location: Woodward, OK
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I dunno, am I just totally inept? 20k would take roughly 20 months to save up for me, and that's scrimping every single penny after bills and groceries. And I absolutely cannot stand to see 20k in cash sitting around doing no work for me whatsoever. Do average people REALLY just have 20k in the bank at all times? Maybe I need a new employer if that's the case.
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Thu Jun 09, 2011 10:40 pm |
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maresf16
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And I dare to think it would take even more than 20 months for someone working a "normal" job to save that much. Especially with kids to pay for. I'm not going to wait two years. I wanted out of the rat race yesterday. In two years I could have made a huge return on that money by investing it in the market. You're telling me that's what I have to do?
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Thu Jun 09, 2011 10:42 pm |
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coaster
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quote:
Originally posted by maresf16
I Do average people REALLY just have 20k in the bank at all times? Maybe I need a new employer if that's the case.
Average people do have their money sitting in the bank doing nothing. Though I doubt it's as much as $20K.
There's more that goes into the decision matrix than what the money is earning. And in these days of very low interest rates, what the money can earn isn't a very heavy weighting in that matrix.
In two years you could have had a huge loss in the market if you had been having this discussion with yourself several years earlier.
Judging what you could have done with your money by putting it in one asset versus another over a two-year period is just plain foolish. You need to think in terms of decades if you're going to be thinking of where the money should be invested. The rule of thumb is that you don't put any money you're going to need in the next five years into a variable asset.
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Fri Jun 10, 2011 6:53 am |
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coaster
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Something else that's just plain foolish is getting into the landlord business with such tight finances. If you can't afford to put 20% down you aren't adequately capitalized to be a landlord. What's going to happen the first time something breaks? When tenants move out and have trashed their unit? Property taxes? One of our members here has a lot of experience in this area; I hope he sees this and has some input. But I'm guessing that he's going to tell you that you need either a ready line of credit or some ready at hand liquid assets in the $3-$5K ballpark to own and manage a four-plex.
I once had a landlord who was so over-extended that he couldn't afford a $500 repair even when I offered to pay half (outright, not a loan). I was outa there within the year. That's not the kind of landlord I want. (Fortunately I'm my own landlord now  )
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Fri Jun 10, 2011 6:59 am |
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maresf16
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Location: Woodward, OK
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Yes, I know it's risky. Maybe a head-first approach isn't the right one, but you don't learn anything about being a landlord from, well, not being a landlord. My thinking on this property was that it was throwing off enough cash to cover unforeseen expenses. I'm not looking to break the bank on my first investment, I'm simply hoping to break even and do a lot of learning along the way. I'm typically impatient when it comes to things I have control over. Running a rental property is safer, to me, than buying a stock I have no control over. I can only do my best, crunch the numbers and read the news. If it were a rental property management, at least I have quite a bit of experience in renovation and home improvement.
Anyways though, I thought of seller financing. He's had it on the market for a while now. I want to go have a look at things. If it seems like it's not in need of any massive repairs in the near future, I'll pitch him the idea. Seller financing on 25% of the purchase price and bank financing on the rest. I'm not particularly hopeful though.
One other question: do you get suspicious when someone is selling a good asset? My first thought was why would the guy be selling it if it's got a good cash flow? Of course, there are plenty of legitimate reasons - tired of managing it, moving, etc. But the thought that there's a hidden lien or delinquent taxes or major repair needed is lurking in the back of my mind.
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Fri Jun 10, 2011 9:20 pm |
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coaster
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That's one major reason I'm not a landlord. I'm no good at reading people....judging whether they're telling me the truth or not. If you are, then trying to get a sense of what the seller's motives are. Some of the other stuff.....liens, back taxes, should be available via public records, but how you get that info depends to a degree on your local and state laws.
You admitted impatience as your weak point. Well, you know how to counteract that, then.
Best wishes, good luck, and let us know what you decide and how it turns out.
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Sat Jun 11, 2011 5:44 am |
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littleroc02us
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Coaster brings up a lot of good points about totally leveraging a rental and have a number of things go wrong and you have no cash to take care of them. I myself plan on being a lanlord someday, but I'm taking a more conservative approach that should put me in a low risk situation to bring in steady income and handle the times when there aren't tenants. I plan on paying off most of my mortgage so that I have a ton of disosable cash that I can save up to put 20% down on a rental and then other cash savings set aside for emergencies and mortgage payments. I would seriously look at the worse case scenarios always when planning on buying rentals.
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Mon Jun 13, 2011 4:58 pm |
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maresf16
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No movement so far on things. Waiting to see if it goes anywhere.
There are a lot of good points here. Maybe buying the rental property right off isn't the best idea. Plus, it would probably be difficult to get rid of if I do move in the future.
Maybe a more "conservative" approach is to buy a house, live in it and rent it out. That's an idea I've already toyed with quite a bit. Much less capital up front, more liquid than a rental property and less risk involved. It's a lot easier to get into financing-wise than a rental. And it'd give me some experience as a landlord I suppose.
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Mon Jun 13, 2011 6:12 pm |
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oldguy
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quote:
Yes, I know it's risky. I'm typically impatient when it comes to things I have control over. Running a rental property is safer, to me, than buying a stock I have no control over. I can only do my best, crunch the numbers and read the news.
There are a couple of basic truths that you will need to come to grips with.
1.) You need risk, it makes no sense to say "it's risky", you need to evaluate the risk level. Risk and return are directly proportional. So make a decision about the return/risk that you desire. Don't waste effort looking for a 'no risk' investment that will double your money in a yr.
2.) Rental property is NOT inherently safer than stocks - I can (and do) leverage houses to make 50% returns. You can adjust either investemtn to obtain your dsired risk level - ie, you can use margin or derivatives to add risk to stocks, just as you can add risk to houses with leverage.
IMO wealth is created by using both stocks and leveraged RE, that provides an excellent diversification - some yrs one makes money, some yrs the other makes money, and often both make money.
But in your case, where mobility is required, it will be easier to build wealth in stocks - and add the RE at a later time. You'll probably want about 50/50 some day, but nothing wrong with first building $200k or $300k in stocks before pulling some out for RE.
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Mon Jun 13, 2011 6:42 pm |
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kathyethans
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quote:
Originally posted by maresf16
One other question: do you get suspicious when someone is selling a good asset? My first thought was why would the guy be selling it if it's got a good cash flow? Of course, there are plenty of legitimate reasons - tired of managing it, moving, etc. But the thought that there's a hidden lien or delinquent taxes or major repair needed is lurking in the back of my mind.
Check out the property for these kind of stuff, if thee are too much to repair then it would be your lost for you have all to fixed those stuffs in order to find a renter.
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Mon Jul 04, 2011 3:56 am |
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chrisgayle
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| Financing a Rental Property |
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A commercial property that the investor rents out is comparable in risk or return to a low-investment-grade. Industrial property has higher risk and returns, followed by residential. While the application process for rental property is fairly similar to that of an owner-occupied mortgage, the financing for renovating and reselling houses is completely different.
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Fri Jul 08, 2011 4:32 am |
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oldguy
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quote:
While the application process for rental property is fairly similar to that of an owner-occupied mortgage
I applied for a refinance on one of our rental houses yesterday - I was quoted 5.375% on a 30 yr fixed rate. That is probably either a 1/2% to 3/4% premium of NonOO to Owner Occ. (I didn't take the loan, the payback on the costs was almost 4 yrs, not much help, I'll 'shop' it)
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Fri Jul 08, 2011 3:09 pm |
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jfurnish
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I bought my first rental property just like the this. It was a triplex and I lived in one of the units so I did qualify for all of the first time buyer deals and also owner occupied low down deals. It was the best thing I ever did and it was in a market just like this one in the late 90's.
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Sun Jul 10, 2011 1:46 am |
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