How did you finance your rental unit purchase?

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workingovertime
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How did you finance your rental unit purchase?

Post by workingovertime »

Currently, I max out my 401k and Roth IRA. I also own a home that I live in myself and I am within few months of meeting the 20% equity using the purchase price. I can pay down principal now but interest rate is below 3% and running the math on PMI versus present value of additional principal payments comes out favorable on paying PMI since it is so low.

I'm interested in purchasing a rental unit but with exception of just generating more salary from my full-time job, I'm having trouble coming up with a way to finance 20% down payment for the rental unit. I have capital in my investment portfolio that is many times multiple of my annual salary but I'm not interested in using that. As I mentioned, I also max out retirement accounts but I'm not interested in forgoing this. Essentially, is my only option to either 1) make more money so that I can both max out retirement accounts and save up for 20% down payment; 2) sacrifice investment to focus on purchasing rental unit or (not willing to do this); 3) incur other loans of some kind? My current salary is near $100k with a good upward trajectory. Unfortunately, schedule doesn't allow me to take on a weekend job.

I have about 6 months of emergency saving so not really low on cash. My problem is that I'm interested in a 2nd real estate but I'm risk averse and not sure how to go about this. Maybe I'm looking for the magic answer that doesn't exist?
BHawks87
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Re: How did you finance your rental unit purchase?

Post by BHawks87 »

There really is no magic answer. You will either have to save up cash and use that or use some type of loan. Sounds like you can't get a HELOC yet since you don't have enough equity. Do you have a taxable account that you could take a margin loan on?

Using a loan for a down payment adds much more risk and you say you are risk averse so just saving cash would probably be your best option.
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leonidas
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Re: How did you finance your rental unit purchase?

Post by leonidas »

workingovertime wrote: Fri Dec 03, 2021 12:19 pm
I have about 6 months of emergency saving so not really low on cash. My problem is that I'm interested in a 2nd real estate but I'm risk averse and not sure how to go about this. Maybe I'm looking for the magic answer that doesn't exist?
Good Afternoon,

What type of Rental is it? Single family house or something bigger? I bought a rental this year, single family home and some lenders wanted me to put 25% down and others asked for 20%. For me, I could not find anyone willing to do for less than that. I have been saving for a while so I had the money and the Down payment wasn't bad since it was in a Low cost area (Indiana) where the cash flow is pretty good but price appreciation is muted. Before that house came up I was looking at something bigger (quad) and I would have taken on a partner. Maybe there is someone you trust that can go in with you?

I'm thinking you have a place in mind and did you run the numbers and the returns are better than what you can get investing? Just know that most rentals are not so hands-off but I have had a relatively easier time than some of my family who had tenants from hell.

Good luck.
Visitor76
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Re: How did you finance your rental unit purchase?

Post by Visitor76 »

Pay off your primary residence first along with any other debt you may have. That way you are on a solid financial foundation. You don't want to be juggling multiple mortgages. What if you can't find any renters right away and you're stuck paying on two properties?
Wealth is not about having a lot of money; it's about having a lot of options.
LittleMaggieMae
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Re: How did you finance your rental unit purchase?

Post by LittleMaggieMae »

I did 20% down with a tradition 30 year mortgage on a rental property (townhouse) that cost 50K - I opted to borrow the down payment via the HELOC on my primary home (paid if off in 12 months).

A few years later I took a new mortgage on my paid off primary home to be able to pay cash for a cute little uninhabitable SFH 70K house (I didn't want to do a rehab loan) I paid cash for the fix ups. (having a paid off house didn't really give me much in the way of warm fuzzies and the interest rate on my primary home mortgage was DRAMATICALLY lower than the loan for the rental property. My issues with high loan interest rates may be because of the small size of the loan I am looking to take - usually under 100K. )

My relatives have purchased much nicer rental properties (closer to 200K and sometimes over) - they do 5% or 10% down and 30 year mortgages. They use saved up "cash" for the down payment and the "prep for renting" costs.

None of us are currently looking for possible rental properties - the prices in the areas we look/buy are way too high to make buying and renting worthwhile - even for the uninhabitable ones. :(

FYI: even if you buy a "move in ready" house - you will need cash on hand to pay for setting up the utilities in your name, paying those monthly bills, and possibly a few mortgage payments, and having someone mow the lawn until you get a renter, fixing/repairing any of the small things you 'discover' aren't right/or break soon after taking ownership. I tend to have the estimated cost of the fix ups for the "fixer upper" I'm buying in cash plus another 5K. My relatives who buy "move in ready" houses have said they also have 5K to 10K available for after the purchase.... that covers most after purchase "repairs" or decorating things and several months of utilites/mortgage while they work on getting a renter. Rental properties and that initial purchase and first renter is not something for the feint of heart or someone with shallow pockets.
Last edited by LittleMaggieMae on Fri Dec 03, 2021 2:30 pm, edited 3 times in total.
ny_rn
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Re: How did you finance your rental unit purchase?

Post by ny_rn »

If you are having trouble coming up with the downpayment, then I assume you have $0 in cash reserves for this potential rental.
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leonidas
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Re: How did you finance your rental unit purchase?

Post by leonidas »

LittleMaggieMae wrote: Fri Dec 03, 2021 2:15 pm
My relatives have purchased much nicer rental properties (closer to 200K and sometimes over) - they do 5% or 10% down and 30 year mortgages. They use saved up "cash" for the down payment and the "prep for renting" costs.
Who did you go with to get 5%-10% down? At first, I was asked to put 25% down then I got to 20% but with a small bump in the interest rate.
LittleMaggieMae
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Re: How did you finance your rental unit purchase?

Post by LittleMaggieMae »

leonidas wrote: Fri Dec 03, 2021 2:28 pm
LittleMaggieMae wrote: Fri Dec 03, 2021 2:15 pm
My relatives have purchased much nicer rental properties (closer to 200K and sometimes over) - they do 5% or 10% down and 30 year mortgages. They use saved up "cash" for the down payment and the "prep for renting" costs.
Who did you go with to get 5%-10% down? At first, I was asked to put 25% down then I got to 20% but with a small bump in the interest rate.
Sorry, I'm not much help...

I'm not sure what lenders my relatives went with that allowed the lower down payment. No properties have been purchased since the beginning of 2019 and all were local houses (so no long distance landlording or properties in "trendy" places. Just regular old SFHs usually older smaller ones so not so likely to get purchased as a primary family home - cause everyone wants giant kitchens and open floor plans and marble counter tops. :) The local lenders seemed to be a little easier to work with on loans on local properties back then. The lower down payment came with a bump in interest rate.
ADDED: I know there was often some concessions or something else from the seller to help defray some of the costs. When the people selling the house are distressed financially or emotional (getting divorced) they tend to be willing to sell their home for a little less just to end the agony. :)
phxjcc
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Re: How did you finance your rental unit purchase?

Post by phxjcc »

Try Franklin Loan Center in SoCal.

I don't know if they are "blue sky'd" for other states.
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Sandtrap
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Re: How did you finance your rental unit purchase?

Post by Sandtrap »

workingovertime wrote: Fri Dec 03, 2021 12:19 pm Currently, I max out my 401k and Roth IRA. I also own a home that I live in myself and I am within few months of meeting the 20% equity using the purchase price. I can pay down principal now but interest rate is below 3% and running the math on PMI versus present value of additional principal payments comes out favorable on paying PMI since it is so low.

I'm interested in purchasing a rental unit but with exception of just generating more salary from my full-time job, I'm having trouble coming up with a way to finance 20% down payment for the rental unit. I have capital in my investment portfolio that is many times multiple of my annual salary but I'm not interested in using that. As I mentioned, I also max out retirement accounts but I'm not interested in forgoing this. Essentially, is my only option to either 1) make more money so that I can both max out retirement accounts and save up for 20% down payment; 2) sacrifice investment to focus on purchasing rental unit or (not willing to do this); 3) incur other loans of some kind? My current salary is near $100k with a good upward trajectory. Unfortunately, schedule doesn't allow me to take on a weekend job.

I have about 6 months of emergency saving so not really low on cash. My problem is that I'm interested in a 2nd real estate but I'm risk averse and not sure how to go about this. Maybe I'm looking for the magic answer that doesn't exist?
If you used a HELOC or loan you are highly leveraged and not in a good position. Going into residential self owned income property rentals requires "deep pockets", (aka: cash reserves).
What if the tenant does not pay rent for 3 months? How do you cover your mortgage?
What if there is an extended lawsuit and vacancy? " "
And so forth.

Suggest you have a more solid financial foundation then pay for a rental in cash or at least have large cash reserves.
Wait. . .there's nothing wrong with waiting. .
Wait. . .

As for myself. I paid cash for my lst rental unit, cash for the following one's, cash for an apartment building later on, etc, etc.
j :D
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Topic Author
workingovertime
Posts: 376
Joined: Sun Dec 27, 2015 7:06 pm

Re: How did you finance your rental unit purchase?

Post by workingovertime »

Sandtrap wrote: Fri Dec 03, 2021 8:32 pm
workingovertime wrote: Fri Dec 03, 2021 12:19 pm Currently, I max out my 401k and Roth IRA. I also own a home that I live in myself and I am within few months of meeting the 20% equity using the purchase price. I can pay down principal now but interest rate is below 3% and running the math on PMI versus present value of additional principal payments comes out favorable on paying PMI since it is so low.

I'm interested in purchasing a rental unit but with exception of just generating more salary from my full-time job, I'm having trouble coming up with a way to finance 20% down payment for the rental unit. I have capital in my investment portfolio that is many times multiple of my annual salary but I'm not interested in using that. As I mentioned, I also max out retirement accounts but I'm not interested in forgoing this. Essentially, is my only option to either 1) make more money so that I can both max out retirement accounts and save up for 20% down payment; 2) sacrifice investment to focus on purchasing rental unit or (not willing to do this); 3) incur other loans of some kind? My current salary is near $100k with a good upward trajectory. Unfortunately, schedule doesn't allow me to take on a weekend job.

I have about 6 months of emergency saving so not really low on cash. My problem is that I'm interested in a 2nd real estate but I'm risk averse and not sure how to go about this. Maybe I'm looking for the magic answer that doesn't exist?
If you used a HELOC or loan you are highly leveraged and not in a good position. Going into residential self owned income property rentals requires "deep pockets", (aka: cash reserves).
What if the tenant does not pay rent for 3 months? How do you cover your mortgage?
What if there is an extended lawsuit and vacancy? " "
And so forth.

Suggest you have a more solid financial foundation then pay for a rental in cash or at least have large cash reserves.
Wait. . .there's nothing wrong with waiting. .
Wait. . .

As for myself. I paid cash for my lst rental unit, cash for the following one's, cash for an apartment building later on, etc, etc.
j :D
How did you get all that cash? Did you just have high income?
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Sandtrap
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Re: How did you finance your rental unit purchase?

Post by Sandtrap »

workingovertime wrote: Sat Dec 04, 2021 3:21 am
Sandtrap wrote: Fri Dec 03, 2021 8:32 pm
workingovertime wrote: Fri Dec 03, 2021 12:19 pm Currently, I max out my 401k and Roth IRA. I also own a home that I live in myself and I am within few months of meeting the 20% equity using the purchase price. I can pay down principal now but interest rate is below 3% and running the math on PMI versus present value of additional principal payments comes out favorable on paying PMI since it is so low.

I'm interested in purchasing a rental unit but with exception of just generating more salary from my full-time job, I'm having trouble coming up with a way to finance 20% down payment for the rental unit. I have capital in my investment portfolio that is many times multiple of my annual salary but I'm not interested in using that. As I mentioned, I also max out retirement accounts but I'm not interested in forgoing this. Essentially, is my only option to either 1) make more money so that I can both max out retirement accounts and save up for 20% down payment; 2) sacrifice investment to focus on purchasing rental unit or (not willing to do this); 3) incur other loans of some kind? My current salary is near $100k with a good upward trajectory. Unfortunately, schedule doesn't allow me to take on a weekend job.

I have about 6 months of emergency saving so not really low on cash. My problem is that I'm interested in a 2nd real estate but I'm risk averse and not sure how to go about this. Maybe I'm looking for the magic answer that doesn't exist?
If you used a HELOC or loan you are highly leveraged and not in a good position. Going into residential self owned income property rentals requires "deep pockets", (aka: cash reserves).
What if the tenant does not pay rent for 3 months? How do you cover your mortgage?
What if there is an extended lawsuit and vacancy? " "
And so forth.

Suggest you have a more solid financial foundation then pay for a rental in cash or at least have large cash reserves.
Wait. . .there's nothing wrong with waiting. .
Wait. . .

As for myself. I paid cash for my lst rental unit, cash for the following one's, cash for an apartment building later on, etc, etc.
j :D
How did you get all that cash? Did you just have high income?
I first opened a licensed General Contracting company, mostly specializing in commercial (highest profit margin at times), the opened a R/E development company, then a R/E property management company.

The profits from all that went toward purchasing rentals. We lived on "hamburger helper without the hamburger, did not buy a home, had minimal expenses", knowing that there would be a payoff once a foundation was established.

Eventually, we had a handful of apartment buildings and high rises.

Like starting an orchard, you start with baby plants and things with no fruit, but eventually, they all start blooming and fruiting.
j :D

*Read, "Millionaire Next Door", the paths are proven but require hard work and guts and a bit of business savvy/instinct, and sometimes, ruthless ambition, and sacrifice.
Not everyone has those qualities. (IE: Navy Seal, seal, otter, rabbit, sloth, etc)(Movie: "Zootopia"). (kidding)

*Read: various business books on "horizontal" vs "vertical" expansion. IE: rockefella vs carnegie, etc. or Gates vs Bezos.

*Perhaps each person has a right "mind for things" neither write or wrong. Employee mind, Employer mind, Entrepreneur mind, "Hive Mind (Borge?), :shock: :shock: . . . . I don't know. It seems that way that people excel at various things.
Last edited by Sandtrap on Tue Dec 07, 2021 6:06 pm, edited 1 time in total.
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Tal-
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Re: How did you finance your rental unit purchase?

Post by Tal- »

My rule #1 of real estate: Never be cash poor.

My personal view (based on a decade of personal experience) is that to start with real estate, you should have the 20% down, plus an additional 20K to 40K, above your standard emergency fund, in a highly liquid form. I've had multiple 20K - 30K expenses over in my real estate portfolio over the last few years.

I would also caution you against being over-leveraged, and barring additional details, I would not advocate you taking out another loan to cover these costs (I could be talked out of this depending on specifics).

I also think that most people should only invest in real estate if they can max out their 401k and have money left over for real estate. This is a high bar, but I think that this is appropriate.

Given these, I would suggest continuing to max your retirement account and focusing on increasing your income.

I'm certain that you will find people who will advocate that you prioritize real estate, leverage everything, and go all in. But my personal view is that such aggressive action puts your long term financial stability at unnecessary risk.
Debt is to personal finance as a knife is to cooking.
SRenaeP
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Re: How did you finance your rental unit purchase?

Post by SRenaeP »

I've purchased two rental properties. For both, I saved up enough cash to put down 20%. I purposely sought relatively inexpensive (<$150k) properties in order to minimize the amount of cash required out of pocket.
Paddygirl
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Re: How did you finance your rental unit purchase?

Post by Paddygirl »

I took a loan out on my primary mortgage and purchased a duplex. The renters paid the mortgage plus extra. Sold it and retired.
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Sandtrap
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Re: How did you finance your rental unit purchase?

Post by Sandtrap »

Paddygirl wrote: Tue Dec 07, 2021 5:43 pm I took a loan out on my primary mortgage and purchased a duplex. The renters paid the mortgage plus extra. Sold it and retired.
Congratulations!
Good moves.
:sharebeer
j :D
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Sandtrap
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Re: How did you finance your rental unit purchase?

Post by Sandtrap »

Tal- wrote: Sat Dec 04, 2021 7:34 am My rule #1 of real estate: Never be cash poor.

My personal view (based on a decade of personal experience) is that to start with real estate, you should have the 20% down, plus an additional 20K to 40K, above your standard emergency fund, in a highly liquid form. I've had multiple 20K - 30K expenses over in my real estate portfolio over the last few years.

I would also caution you against being over-leveraged, and barring additional details, I would not advocate you taking out another loan to cover these costs (I could be talked out of this depending on specifics).

I also think that most people should only invest in real estate if they can max out their 401k and have money left over for real estate. This is a high bar, but I think that this is appropriate.

Given these, I would suggest continuing to max your retirement account and focusing on increasing your income.

I'm certain that you will find people who will advocate that you prioritize real estate, leverage everything, and go all in. But my personal view is that such aggressive action puts your long term financial stability at unnecessary risk.
Great points.
Well said.

Thanks for posting this.
j :D
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Slacker
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Re: How did you finance your rental unit purchase?

Post by Slacker »

Rent out your current house and you can get a new primary residence with favorable loan terms.

If your next house needs a little work, you replace cash on hand with your own sweat equity by buying a less desirable house that you can reasonably fix up yourself. (A popular term for this is "BRRR" buy, rehab, refinance, rent out, repeat; the refinance part is where they have added value to the property to effectively cash out refinance their initial down payment through higher appraisal of the property - clearly this is a strategy that involves a high level of debt be acceptable in your real estate portfolio).

I'm not specifically recommending your personal course of action, just providing knowledge of what is possible and others have done.
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