Will This Actually Work???
I am new here and wanted to see what you guys think about this; any advice would be appreciated…………..I have been thinking about getting rental property for some time now, and my brother and I have decided to look seriously in to it. One idea we had was this, but we’re not sure if it will work: Decent rental properties can be bought here for $25 to $30 thousand up. If we were to find, for example, a situation in which a property was appraised for $32,000 but for which the seller was asking $27,000, and we were able to talk the seller down to $25,000 and then got a loan for that amount from a private source (a relative) and purchased the poperty, would we then be able to refinance the house for the appraised amount and immediately (or soon thereafter) give our relative back his investment (plus 1 or 2 thousand for the loan), and use what was left over for fix up and rainy day money?
I ask this mainly because our credit is less than perfect, but the loan would be against the house, so do bankers care? Also, if this can be done once, is there any reason why we can’t borrow the same $25,000 from him again and repeat the process over and over?
Like I said, I’m fairly new to this, so any advice will help. Thanks.
If you refinance the property, you are certainly going to have your credit pulled - no doubt about it. In theory, it would work but if your credit is really bad - you will have to deal with incredible interest rates, pre-payment penalties, and points. Talk to a mortgage broker, have him/her pull your credit before you invest and ask him/her what he could likely do for you in your current situation. He/she will probably have some suggestions on what to do about repairing your credit as well!
Good Luck!
[addsig]
There are MANY more people on here that are much more qualified to answer this than I, but here's my take.
Yes, they DO look at your credit when it comes time for a refinance. Then, when it comes time to do the 2nd rental property, they look at the first, and only allow you credit for 75% of your rent to cover your mortgage, so you could take a hit there, if your rent's not enough.
The other deal is, you need to keep your loan at less than 80% of ARV, so you don't have to pay PMI each month.
Doing it like you described is how MANY people, myself included, have done it, except I have to go to other sources for the original acquisition funds.
You could look at perhaps using Sub 2 to acquire the house, and not have to open up a new loan, there's several techniques you can use to get control of it, you just gotta spend some time learning them...
Good luck with it!
You won't have much left after paying loan costs unless you can get better than 80% of appraised value.
1. Credit matters
2. Not all lenders will allow a refinance based on the value immediately after a purchase if the purchase price is less then the value. Some do. Others want 6 or 12 months to pass before they will look at a higher value.
3. You can do as many of these as you like. Many lenders will allow 75% of the rental income to be allocated to the mortgage. They are assume the rest of the rent if for vacancies, maintenance, etc. So, if the cash flow is tight on the first one then when you go to do the second the first property will look cash flow negative and reduce your ability to finance the second one. You will need to show income from other sources in this case.
Flipped around, if the 75% income from the first one exceeds the mortgage payment then you will have passive income that can be used to help qualify for the second property.
John
PS. No matter what you do, start working on the credit situation. It takes time to remove issues (either mistakes or real issues) so you might as well work on it at the same time.
[addsig]
Thanks for the information, everyone. I'm really glad to have found this site.