125 Loan / Just getting started

I’m glad to have found this forum…and now my first post. I’ve always felt entrepreneurial in nature but never had the funds to get anything off the ground. It’s hard to get a loan from the bank even if you do have a business plan in line. It’s taken me long enough but I’ve finally realized that Real Estate is something that can give you Real Assets essentially without putting much money down. No business plan needed, just need to show (most of the time) that you will be able to re-pay the loan. Down the road Real estate through appreciation, improvements, etc, re-fi can grant you the funds to actually do whatever you want with. Whether re-invest in RE or move onto other ventures.

I’ve overcome the few fears that grip I think the majority of us before jumping into the REI realm. The thinking “how am I going to do this”. “Do I have enough money etc.” I put an offer on a 3-unit aparment building not far from where I live. Working with a buyer’s agent I think we put together a pretty good contract. $153,000 was the price w/ 10k cash back from seller. The place was under contract earlier but upon city inspection seller was told he needed to fix property within 90 days. I think the buyers were trying to do a 1031 and were constrained by time…either way they didnt want to wait. Along I come into the situation. I think it’s a good start in REI and will give me more opportunities down the road. We made the contract contingent upon all repairs being fixed. The previous landlord got lazy, was trying to maintain multiple properties, was going into other investments, I think we all know the story of lazy landlords. Needless to say there is much room for improvement (esp. in rent increases).

I am set to close on the 31st of October and my head is already spinning as to what I can do to get my next property. I recently took a Real Estate Principals and Practices course and met a lot of people who can help me down the road. Some are appraisers, beginning loan officers, very experienced loan officers, agents…I think we get the picture. I have been investigating the 125% loan. The loan I’m getting on my property is a 2/28 interest only loan, no pre-payment, no PMI and one loan. Around $1,200 on loan origination, 5-6,000 on closing costs. Looking to lock the rate soon, glad the rates have been dropping of late as well :slight_smile:

My loan officer has told me that after a bit of seasoning 2-4 months it could be possible to take a 125% loan giving me about $40k. I know the 125% loan could be risky but I feel it depends on what you decide to do with the money you get that is very important. It can be used wisely bringing you more money (re-investment), or could be used regularly which could still help you improve your personal cash flow (consolidation of debts. etc.) Heck it can even be used stupidly

So…I’m thinking of doing the 125% loan to get some funds…From here I’ll goto a small bank in this particular city. I’ll definitely stay away from the big banks like HSBC, Chase, PNC, and goto a small town bank in this city. I’ll attempt to speak with no one but a manager or someone who is in charge of making big decsions. I’ll take about 10k of that 40k which I got and invest in another multi-unit (probably). I will take about 20-25k of the 40k and open a CD with this small-time bank and start some relationship banking. In one months time I go back to the bank and sit down with the manager and ask to use my CD as collateral for a line of credit…From there I continue on obtaining properties, opening CD’s and extending/increasing my lines of credit until I’ve built it up upwards to $150,000+ by this time I should be more experienced and ready for additional challenges.

The goal is to have a large line of credit, multiple projects working and a pocketful of $15000-20,000 in travelers check’s ready for anything I may come across during my travels.

Please critique this plan and tell me what pitfalls you see…I know I have to be careful to make sure and re-fi the interest only loan before the 2 year fixed period is up (depending on what’s going on economy) as well as keeping the 125% loan in order. I plan on keeping the first property for some time unless there is a better opprotunity in selling it.

All advice/comments/ words of wisdom is welcomed


You’ve done a lot of talking about borrowing money, but no talk about making money. All borrowed money must be paid back with interest and you’ve already done something that I would not do - borrow with an interest only loan. One of the ways that you make money with rentals is allowing the rents to pay off the mortgage. You don’t have that.

Everything with rentals depends on the numbers. Ignore this and you’ve destined to go out of business. Simply owning a rental does not assure success. In fact, the vast majority of new landlords go out of business in a short period of time, after losing a bunch of money. Nearly all of these failures have one thing in common: THEY PAID TOO MUCH FOR THE PROPERTY. You haven’t posted the rents, but at $153K for 3 units, that is more than $50K per unit - very high in my opinion. Of course, if you’re getting ridiculously high rent, then maybe you could make it work. Why not post the numbers and we can evaluate this deal?

I certainly would not borrow 125% of the value of the property. This will never cash flow. Money is not needed to buy properties. There are a bunch of ways to buy properties without using your money.

A much better plan would be to find properties at a big discount and that have a significant positive cash flow. I would not borrow more than 70% of the value of the property under any circumstances and would only use fully amortizing loans. If the property won’t provide a significant positive cash flow under these circumstances, then I wouldn’t buy it.

Finally, remember that loan officers, appraisers, other investors, etc do not have YOUR best interest in mind. They are trying to make money for themselves and don’t care whether you succeed or not. Loan officers frequently suggest loans that almost guarantee failure. Get educated!

Good Luck,


Here are the numbers…The deal has not gone through, loan yet to get approved so ALL constructive criticism is appreciated. Here is where current rents are at. Contingencies are in place (i.e. financing, repairs, inspections, etc.)

Building was listed at $169,900
153K for 3 1-bdr apartment buildling 10k cashback from seller
Market rents for 1-bedrooms around the buildings rooms average around $500

$475 ( 1 year lease)
$300 ( Tenant’s apartment had some problems which need to be fixed contract contingent upon) Renter is month-to-month
$425 month-to-month have been living in building for 3 years
$40 garage in back rented out


My plans
$475 (1 year lease)
$475 get 2nd apartment to move-out/move on or accept increase
$450 last aparment good tenants, keep apt good shape,want to keep if they must move out apt for $475
$50 for garage (maybe convert to car port)

$1450 (17400)

Expenses per year: $3420 without mortgage
Expenses w/ mortgage: $15180

$+2280 cash flow for year

Now from all the books which I have been reading I know you are supposed to base your calculations on supposed rents etc. Now from a business management standpoint you analyze the current financial situation under previous management but also take your skills into consideration and also calculate what you could do to the property under your management? What are peoples thoughts on this?

Ideally we all wish we could acheive 10-15% cap rates on all of our deals but is there a starting point in which you decide to jump in and look/search for better deals with more experience?

Thanks for all of your help. Any creative ideas are welcomed…I don’t plan on keeping the interest only forever ;D

Still waiting for appraisal to come back as well


Here’s how I would evaluate this deal.

Let’s assume that you get the full $1,450 gross rent per month. Throughout the entire United States, operating expenses (including capital expenses) run 45% to 50% of the gross rents. Therefore, in your case, you should count on operating expenses being $725 per month. This will leave $725 per month to pay the mortgage and to have a little profit. Even interest only, at 8%, you’re looking at an interest payment of $1,020 per month. With a fully amortizing loan, you’re looking at a payment of $1,122. Therefore, you’re looking at a loss of $300 to $400 per month on this property. I don’t know about you, but I not too interested in to many investments that lost money.

Just for comparison, here’s one of my actual apartment buildings. It is a 4 unit building for which I paid $75,000 (it appraises at $115K). It also has a 2 car garage (in bad shape) and another storage building. I currently have 1/2 of the garage rented for $25/month. The gross rent on the 4 units is $1,400 which with the garage gives me a total gross rent of $1,425. My mortgage payment on a 20 year loan (P & I) is $600 per month. This gives me a positive cash flow of $112, which is still terrible. I make extra money on this property by doing all the management and maintenance myself. This gives me approximately 15% of the gross rent in additional income. So, the end result is that I make $332 per month positive cash flow.

Here’s the tricky part. I actually put more than $332 per month in my profit column almost every month. That’s because many of the expenses don’t occur every month. For example, I don’t have evictions every month. I don’t have to replace the roof every month. I don’t have a lawsuit every month. I don’t have one of the tenants do severe damage every month. I don’t have vacancies every month, ETC, ETC, ETC. However, the BIG mistake that most newbies make is to pretend that these expenses don’t and won’t occur. Underestimating your real expenses is a sure way to losing your business.

Good Luck,


Hi optimistic!

I was just going to say I believe PropertyManager is right on the money with the analysis. I ran through the numbers in my head before I saw his post and he basically said exactly what I was thinking.

When evaluating an investment property, you must include management and maintainance even if you are doing it yourself. Of course you also have to include damage,forclosure and all the others he mentioned. If you do not, you will seriously overpay for the property.

I was going to say you will need to get this property for around 80 to 90 thousand with probably some down payment to make it cash flow in the long term.

Anyway I hope this helps and good luck!



What property market are you in and have your properties at?

How do you propose finding these types of properties which can cash flow according to your calculations in markets such as Washington D.C. Metro area, NYC, Chicago and other more established markets (and yes they are over-inflated). Do you ever go against your calculations if you believe you are in an area which has not peaked and there is still room for quite a bit of growth? ( I know I’m sounding a bit speculative here).

Thanks for both of your thoughts/analysis. It has definitely been an eye-opening experience


I’m in Ohio, but these same deals can be found in almost every RED state. I am not saying that you can find these deals in the cities you mentioned. The key point is that if you buy properties that won’t cash flow, you will soon be out of business, whether you’re in NYC or Timbuctoo. Without cash flow, you’ve got a failing business. It really is just that simple. Even if you found the very best deal in your area, it still may not cash flow and therefore I would not buy it.

To answer your question, no - I would not violate my investment rules and bet on appreciation. That is especially true in this market, when we’re in the early stages of a real estate downturn. My research shows that it generally takes 2 years after a boom to reach the bottom. We won’t reach bottom until early 2008. Then, historically it takes 8-10 years for prices (inflation adjusted) to recover to previous highs. Would I bet on appreciation - NO WAY!

Good Luck,


Money is not needed to buy properties. There are a bunch of ways to buy properties without using your money.

Hi Mike,

If you care to…could you take the time to list some bullet points on the different ways to buy properties without using your own money.

Nothing elaborate…just a short list of resources you typically think of as ways to obtain financing other than dipping into your own pocket.


My thoughts exactly Allagash. Please endow us with your wisdom Mike ???

The property I’m considering buying is pretty much with no cash down and 10k back from seller. Of course this makes the loan amount larger which throws off cash flows (building obtained for 143k now is 153k) and I’m considering using a 2 year fixed, interest only loan

Was in the Borders last night reading a few books and people mentioned getting cash advances from credit cards before-hand. Another example was getting money gifted to you from family members, friends, etc.

Curious to know…

I don’t think this is a good investment.

this deal looks a bit marginal. raising rents takes time and effort and even at your proforma rent you will be breakeven (at very best, probably have to put some money into it).

things I would want to see to do this deal:

  1. building would need to be in top shape, roof <10yrs old, reasonable mechanicals (plumbing, furnance, etc)
  2. solid rental history/easy to rent without having to take bottom of the barrel tenants; lots of turnover/bad tenants will kill you

also, I think your plan to use a 2/28 type loan is questionable. I never do less than 5/1 arm; I also do 30 yr fixed as well; depends on the situation, type of property, exit strategy, etc. Two years will be up before you know it and then your expesnes (mortgage payment) will likely take a jump. It take at least a year to get a property up and running well if you have experience (which I do). If your new, you might have learning curve through the school of hard knocks.

propmgmr rough cut estimate of 45-50% of gross rents is not a bad one, but youhave to understand that a large fracton of that data comes from large apt complexes that hire contractors to do everything. This is how you end up with a lot of $75 invoices for changing a toilet paper roller. Also, underlying expenses can vary all over the place by part of the country, type of units, age of building etc. So, you might be at 50% of gross rents or you might be at 30-35%. Over the years, I have had a fair number of properties in several different states and always fallen in the range of 25-45% of gross rents. Typically when I am on the higher side (45%), I’m pushing money into a property to fix it up and get rents up and preparing for long term hold and a sale in 1-2 years.
However, I am very hands-on with my rentals but also use professional property management that I keep close tabs on. Currently I am operating about 30 units in 2 different states split among 4 different property management companies.

as for 125% loans, forget it about that junk. that’s the road the financial destruction.

take it one property at a time. is this the right one to start with…hard to say, it looks kind of marginal, but it could work well for you. best thing to do it lock in a long loan term and then focus on successfully operating the property. I would hold some portion of that $10k cash back in reserve as you will need it until you get things running smoothly.

Mike, could you also give us a bullet point list of methods you’ve used to buy properties at “big discounts” – and how you go about finding them?? That obviously is the ultimate key to successful real estate investing. Just some general ideas, and other examples that maybe you haven’t used yet?



Here are some methods to buy properties without any of your own money:

  1. Buy at a BIG discount and finance 100% of the purchase price. Nothing flashy here. The bank will want you to have some equity in the deal (usually about 30% in my experience). You can either put down a cash deposit or buy below 70% of the appraised value to get the 30% equity. With 30% equity, many small local banks will give you 100% of the money to buy the property.

  2. Buy Subject To the existing financing. Many desperate sellers just want to get out! In a subject to deal, they deed you the house and you make the payments for them. I’ve done several of these. Again, no money from you.

  3. Buy on a Lease Option. Many desperate sellers just want to get out! In a Lease Option, you rent the property with an option to buy it. CAUTION - you do not get the deed until you buy the property so you MUST be able to trust the seller. I have done lease options when I wanted to control an apartment building for a short time before I get a loan for it. If the seller is desperate (like a stressed out landlord), then you can do this without putting down a significant option premium. You do need to give the seller something for an option premium, so I usually give them $10. Not totally “no money down”, but ten bucks isn’t much!

  4. Buy with seller financing. Many desperate sellers just want to get out! In these deals, the seller simply finances the deal. You get the deed up front and the seller gets a note. For this to happen, the seller needs to own the property outright.


Here are some ways to find properties at BIG discounts. Again, I’m not very flashy and don’t do much of that guru nonsense.

  1. Find a hungry realtor. When I first started, I found a 20 year old girl that had just gotten her real estate license. She was hungry and willing to work like a dog to find deals. I told her what I was looking for and she calls me every time she finds one. I have bought several deals through her and am still using her as a source of deals today. NO, contrary to that guru nonsense, I don’t mind paying her a commission. In fact, I often pay her money beyond her commission when she finds me a great deal. I don’t care how much anyone else makes. I only care how much I make.

  2. Find desperate landlords. I’ve bought several apartment buildings from desperate landlords. A good place to find them is at your local REIA. Many people become landlords believing the guru stupidity that landlording is easy. After they have a few nightmare tenants and spend every night wide awake, they’ll do ANYTHING to stop the pain! Some of these people will even bring their own cash to the closing table to get rid of their headache.

  3. Sheriff sales (foreclosure sales) can be excellent sources of properties at big profits. I bought a 3 br, 2 ba with 3 parcels and two 2 car garages for $39,000. The property appraised at $102,000 and needed absolutely no repairs. These sales require a lot of knowledge and a little luck (since you usually can not see the inside of the house before you buy it). I do not recommend these for new investors.

  4. Put a small ad in the paper. Here’s what my ad says: Facing foreclosure? Need Cash Quickly. We buy houses. Call Mike at XXX-XXXX. I’ve gotten a couple of excellent deals from this ad.

  5. Network with wholesalers at your REIA. Other REIA members often have more deals than they can do. They’ll pass their excess deals to you for a small fee (sometimes for free).

  6. REOs can also be an excellent source of cheap deals. You need money or credit to do these deals. Additionally, banks usually do not accept any contingencies. Banks are by far the worst sellers that you’ll ever deal with. They lie. They will shop your offer. They will hold your offer indefinitely, ETC. However, you can get some excellent deals if you are persistent and know the drill.

Good Luck,


Hi Mike,

Thanks for taking the time to reply on this.

Some really good suggestions and tips.


Thanks. This is great advice. I have read 11 rei books and none were as cut and dry as this post. Thanks

I shall print it, frame it, and live it! I wish I’d of read this thread before I bought my rental. ARGHHHH

What do these expenses include exactly?