Help - Creative Financing Tips Needed
I'm looking to get into my first investment property, but am running into some roadblocks. I thought maybe some advice from more experienced investors would help. Here's the situation:
I'm looking to buy a standard 3/2 single-family home to rent out to my parents for one year, who are moving here (to Phoenix) mid-September. So I have reliable tenants right off the bat who are willing to sign a lease in advance for whatever rent I want to put on the lease for the lender to review. Houses in this area like this are selling for $130k-$170k, depending on the subdivision.
I purchased my first home (owner-occupied) back in November. Since then, it's appreciated almost $30,000. The first mortgage is for 80% of the sale price of the home. My uncle loaned me $50,000 for the 20% down, but it's not yet recorded as a second on the home (will be soon), so on paper, it looks like I have about $80,000 in equity, although "true equity" is only about $30,000. I was going to pull out a line of credit on the home for $25k to use for the investment property, but my uncle is uncomfortable with putting himself in third place for payoff. So...I can no longer tap the equity in my home, as he comes first. I'm now in a position where I don't have the up-front cash to do this, but I know if I can get in, I'm going to make some money here.
I don't have a lot of money to put down on a home, but I have guaranteed tenants for at least a year, a burning passion to get into the rental market, and I know I can make this work somehow if I try hard enough. My parents are willing to subsidize any negative cash flow, or put a LITTLE money in up front, in exchange for a small portion of the profits on the sale of the property. They cannot, however, afford to give me the full amount needed for 10% down, closing costs, etc. Maybe a max of $5,000-$7,500 or so right now.
Also, given the fact we need to close before mid-September, if my parents just gave me the money, it wouldn't have time to sit in my bank accounts for at least 2 months, which is something lenders like to see. I wouldn't be able to prove I have had the cash for the required length of time.
How can I get into something like this with little to no money down? I'm willing to consider anything I can to do put my first deal together and thought someone might be able to push me in the right direction. I'm just running into a lot of roadblocks, but I don't want to give up.
On the other hand, maybe I'm pushing too hard and I should just wait until I have more money...but I'm not ready to do that until I hear from others that I'm chasing the impossible right now...
Thanks!
Scott
From my limited experience with lenders, I have found none that are willing to offer an investment loan without at least 10% down. Can your parents lease your current home and you purchase the second as your new primary home? If so you wouldn't need an investment loan and if your credit is good you could probably do it with little or no money down.
Yeah I'm experiencing the same thing with banks, which is why I'm looking to get a little more creative with this. All of the variables in this situation look REALLY good, except for the lack of capital. It's worth exploring a way to get in. Maybe it's not the right time to invest for me, but I won't give up until I've exhausted all options....
I have a little money available from my parents, interest rates just dropped, the housing prices here are still low but rising fast, the rental market is good, my profit analysis looks good (making some assumptions about loan terms)...everything has a green light except for the fact that I'm low on start-up capital.
Just looking for a way around that...
Scott
Keep looking at lenders and I'll bet you find one that will work with 5% down. This can make a big difference. Also, try looking outside the box. What about a subject 2 deal. Or maybe a deal where the homeowner carries back a 2nd. Good luck.
Thanks for your reply, that brings up an interesting question (for me, anyways). Let's say I'm going to purchase a $150,000 home. Let's also assume the seller is willing to carry $15,000 and I can put $5,000 down, so I now need a loan for $130,000, or 86%.
From a lender's standpoint, how does this affect me? Do they still want to see available funds for a down payment in my accounts, or will they be satisfied knowing the seller is carrying the equivalent of a down payment? If I have money to cover closing costs then, should that be all I need to prove to the lender (income aside)?
Also, if I got the seller to carry 20% (unlikely, but this is for my education more than anything), or if the carryback + my down payment equalled 20%, would I still be subject to PMI?
I guess I'm looking for a little information on how a lender views the carryback as it relates to my mortgage application being approved, since they'll realize I'm financing most of the deal. That might help me formulate a strategy.
Thanks,
Scott
Why not get an equity line to pay off your uncle. Then use that money as a down on your investment property? Then your Uncle can have a second on the home that your parents are renting.
If you have good credit you can get a loan with 5 or 0% down on investment property but the rates are a lot higher.
Now this is the kind of thinking I'm looking for.
Let me run through something and get some thoughts from everyone:
My current home (the one I live in):
FMV: $265,000
First Mortgage: $187,000
No Second, but the $50,000 loan from my uncle would be recorded as the second very soon.
So the bank thinks I have approximately $78k in equity (since they don't see the $50k loan), but in reality, I only have about $28k in equity when you factor in the $50k I owe my uncle.
Then I take out a $50,000 line of credit on the first home and use it to put down on the investment property, which we'll say will sell at $150k.
So, now I have this situation:
My home: $265,000
1st Mort.: $187,000
2nd Mort. (HELOC): $50,000
Investment Home: $150,000
1st Mort: $100,000
2nd Mort (My uncle): $50,000
Am I missing anything? Would this work? Anyone want to play devil's advocate with this?
Thanks,
Scott
why not open $78k HELOC, pay off uncle $50k, the rest should cover downpayment (bank should treat HELOC like cash in bank) and closing cost. This will get you what you need. It will show your uncle that your priority is to get him his money back whenever he puts it in your hands. This will allow you to have no trouble borrowing from him to close future deals. You will have to find a lender to give you line to 100% LTV, but with good credit should be no problem on your owner occupied home.