New to Real Estate Investing, need advice

Financing, Hard Money Lenders, Private Money
1

I’m new to this forum, and so far, really like what I’ve seen. I’m in a tough place, and need some advice from someone who really knows what they are talking about. I live in Southwest Florida, and I’m about to put my house on the market to be sold. I’ve been getting mixed advice depending on who I ask this question, so I figured this would be the best place to get the real answers. From the research that I gathered, I should have around 25k to invest after all of my expenses, after I pay down some debt etc. That should be a good 25% down payment on a decent duplex in my area. I only make about 70k/year, so that sort of limits my options. What I’m trying to figure out is, should I take the money, buy a duplex, and rent for a while? That would give me some time to gather more funds for a down payment and get ready to buy a house to live in. My concern with this is that I don’t want to get denied for my primary home loan when it comes time for me to get it. Another alternative is, getting my primary house first, and then try to get the duplex. I really want to start building my property portfolio, but don’t want to start of on the wrong foot. Also, I don’t know if this matters, but my credit score hovers around the 700s. Any other advice on getting started would be much appreciated.

Thank you,

Aleks

2

I can’t really tell what you’re trying to accomplish here.

Are you wanting cash flow, appreciation, forced appreciation, long-term or short-term holding, or what?

It makes zero sense to sell your primary residence to get investing money. Borrow against it.

If you sell the house, and the investment turns out bad, and you lose your investment money, you also don’t have a house of your own to live in either, and then your credit might turn to toast, too. Fail.

If you borrow against the house, and the deal goes bad, you’ve still got a place to live in, despite damaged credit; albeit a higher monthly payment,.

Meantime, if you collateralize your dead equity by creating a note in favor of the seller in order to qualify for conventional financing, you avoid the overhead of selling your primary residence. Also, lien values can be much larger than the actual equity in the property.

You might have $25k in actual equity in your house, but a seller might accept a note for $40k against it, in effective equity…

This of course means the seller is carrying a 2nd on your property. That’s fine as long as it’s just temporary, or just long enough to get conventional financing.

Now this begs the question, “Why not just have the seller carry a 2nd (as a down payment) on the investment property itself, and then get conventional financing?”

Well, many banks won’t finance deals structured this way. So, instead of encumbering the subject property with a 2nd mortgage, you encumber your own house with a 2nd mortgage, payable to the seller (as a down payment).

Of course once the transaction has closed, you want the 2nd mortgage lien moved back to the subject property. This way, you can re-encumber your dead equity again to finance the next property. Theoretically, you can daisy chain your dead equity in your primary residence, over and over, to buy more investment properties.

Most sellers, if they are willing to carry the equivalent of the down payment in the first place, are willing to cooperate with this scheme. If not, I would question whether the property I was buying was actually worth what I was paying. The seller should feel secure about a lien on the property he’s selling. Otherwise, maybe he knows something more than we do. Hmmm.

This is a financing approach that both Barney Zick and Robert Allen have taught for about 30 years. It’s not new, but it’s still an enormously effective, high leverage financing strategy. Barney Zick used to say, it’s OK to take big risks when you’re starting out, because you’ve got little to lose.

Hope that helps.

3

Similar to the prior response…

How are you defining success? Depending on your definition, there could be more than one valid answer.

One successful RE investors (over 30 years plus a few books) would state that you should rent rather than worry about owning your own place. His logic is you can rent a better place than you can likely buy. He would also have you put the extra cash into the investments until they kick off enough cash so you can pay for your home without a day job.