Are you ready to be a Real Estate Investor?
So you want to start buying rent property? Here is what you need to do in order to get started.
First and foremost you need to determine if you are financially able to buy rental property. If you have good credit it really helps but it is not always necessary. If you have little to no money that’s a problem. You don’t need to buy rentals. You need to start saving money. Even if you find a way to buy a property with seller financing with no money down you will still need to have cash reserves to cover maintenance and vacancies. If you have to replace a sewer line for $4,000 could you cover it? If the answer is no then you need to start saving money. You may have to get a second job or reduce your expenses but you’ve got to be financially stable. When we first started buying rentals we had to live way below our means. We drove old cars and lived in a small house. I worked long hours to save up money. We made a lot of sacrifices because we knew it would pay off. In other words, it may take some hard work, sacrifice, and saving up some money.
The next step is to find the money. Where will you get the money to buy rentals. This is the most crucial step. You have 4 basic routes you can go.
1. Use a local commercial lender
If you have good credit this is your best bet because the interest rate will be the lowest. Most banks require a minimum of %15 down. I have been using First Capital Bank for over 10 years. They were the first bank that ever said yes to me. Keep in mind that you may have to save up some money or clean up your credit but in the end it’s worth it. If you get turned down don’t get discouraged. The first two times I met with them they told me no. I just kept working at it and did what they asked me to do. I asked my banker Brad Stuteville to give me a list of things that he looks at when considering making a new loan. This is what he had to say:
“When underwriting new (or existing) loan customers we look at the “5 Cs”. Credit History, Cash Flow, Collateral, Cash and Conditions.
Credit History: A good credit history is a must. Another synonym in my book for Credit is Character. A good credit history shows that a person will be honest and take care of business. I know that sometimes things happen that are out of our control and we consider this also. A medical collection item (out of your control) is different than a Best Buy credit card in default.
Cash flow is a MUST: When looking at a new customer we rely heavily on outside cash flow (W2 job) to support the payments on the rentals/flips they are looking to purchase. Once they have a few deals under their belt we will start giving credit for the rental income that this property may generate. Typically we set flips up on a 6-12 month (depends on the size of the project) with interest due monthly. On a rental we calculate payments on a 15 year amortization with a 3-5 year balloon or rate adjustment period.
Collateral: We require a minimum of 15% down. In ideal circumstances we loan 85% of the lesser of cost or appraised value. Sometimes when the borrower finds a great deal we can include their rehab budget into the cost basis to lower the actual cash that they need to bring to the table. We also look at the condition of the collateral. If the property is in really rough shape they need to be prepared to put more than 15% down.
Cash: The potential borrower needs to have enough cash to create a safety net. In the world of real estate things break! The borrower will need to have a reserve, and I like to see 6 months’ worth of debt payments. This will provide them some protection so that they can still make the mortgage payment when they need to replace an AC unit.
Conditions: Outside of these items we will also consider any economic conditions present in the market that could adversely affect the property. Project feasibility is also considered. IE – if you are wanting to build a 10 unit apartment complex on Soncy and your project is based on rents of $3K/ month… we may advise that you choose another location.”
If you are interested in applying for a commercial loan you can contact Brad at 806-371-3310. You can also visit their website at https://www.fcbtexas.com/
2. Use a private lender
Private lenders are also commonly referred to as ‘Hard Money Lenders.’ A private lender will loan money based on the property. They aren’t as concerned about credit or down payment. They want to make sure you are getting a good deal on the property you are buying. They usually like for you to have a good job and some money in savings but they aren’t as strict as a bank. They charge higher interest rates but the money is much easier to get. I work with many investors who use private lenders exclusively for this very reason. If you don’t have good credit this is a great option to consider. If you are interested in finding a private lender please contact me and I will put you in touch with the ones I know.
Find a partner. This is a fantastic way to get started buying rentals. Find someone with good credit or cash to invest and form a partnership. This can be done in many different ways but usually one person provides the financing and the other person manages the properties and does all the work for a 50% split. I know of many investors who like having a financial partner because they don’t have to worry about making payments or covering repairs. If you decide to go this route make sure to have an attorney draw up a legally binding partnership.
3. Find a seller to provide Owner Financing on the property
Have you ever heard of buying property with no money down and no credit? When people talk about that they are referring to Owner Financing or Seller Financing. This was a very popular method in the 90’s. Unfortunately new legislation has been passed that makes this more difficult. It is extremely difficult to convince sellers to finance their property to you. If you decide to try to go this route you will need to educate yourself and make sure to use an attorney to draw up the documents. Never ever do a ‘kitchen table closing’ without going through an attorney.
The last step is to find your target property. Do you want pretty houses that will go up in value but make very little monthly profit or do you want ugly houses that cash flow? Or maybe you want somewhere in between. I usually recommend the small houses to beginning investors because they have smaller monthly payments and require smaller down payments. They are also cheaper to maintain and provide great cash flow. Once you get to this step I can really help you.
Owning rent property is not for everyone. It is hard work especially in the beginning. Your fist few deals will be your hardest. It gets easier as you gain experience. If you are still interested in owning rentals I highly recommend the book Landlord on Autopilot by Mike Butler. I follow this book very closely in my rental business.