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Since my last post (Millennials, The Missing Participant in The San Diego Housing Recovery) might have been a little depressing for those wanting to own real estate. I wanted to show you some of the creative methods many of us have used to make owning real estate possible.

The FHA203K Rehab loan

I’ve written about this loan before, it was how I purchased my first property and its the grand slam of first time home buyer loans IF you are willing to do the following…

With this loan you can buy fixer upper properties (up to four units!) and your lender will finance the cost to rehab the property into your 30 year loan. This is hands down the BEST possible way to enter the market as an investor on a newbie budget.

You will need solid credit, job history and savings to take you into this safely but you will now find yourself competing with the all cash big dogs for a fraction of the cost.

Pros

  • LOW down payment (3.5% of purchase price and repairs)
  • Allows you to buy a fixer upper (typically cash only deals) and get the repairs financed
  • Can buy up to four units
  • Low interest rates as it is an owner occupied loan

There is one downfall to an FHA loan and that is called PMI (private mortgage insurance) this is a monthly cost that will be built into your payment. This insurance exists to protect the lenders should you default on your loan. Since you’ve only got to put 3.5% down to get this loan, lenders are you have very little skin in the game and want to insure it.

The best route to deal with this is to refinance your property once you have built equity in the property. In the case of my four unit apartment building just two years after purchasing it I was able to refinance it to a conventional loan and eliminate the monthly $350 PMI payment. This won’t happen quickly in most markets but you can expect within ten years to be able to eliminate this payment through a refinance.

Cons

  • Must live at the property for at least one year
  • PMI insurance is required (it’s not cheap)
  • Very complex loan application and approval process
  • Requires the use of a licensed, bonded and insured contractor

 

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Oside dream house, day 1

 

Conventional Rehab Loan

This is a near identical program as the 203K except for the fact you will be making a much larger down payment of 20% of the cost of the house and renovation costs.

The benefit to this loan is that you may use it on an investment property; you aren’t required to occupy it. Although this means higher rates and a larger down payment you now have a way to finance fixer upper investment properties that would otherwise only be available to cash buyers.

 Pros

  • Allows you to buy a fixer upper (typically cash only deals) and get the repairs financed
  • Can buy up to four units
  • Low interest rates although not as good as owner occupied
  • No PMI due to the higher down payment
  • Do not have to occupy the property

This is how I purchased my second property, there is a little more to this story that I will explain later on. What matters is with this loan I was able to secure a second property very quickly and again roll the renovation costs into the mortgage. This meant besides the down payment I did not have to fund the repairs needed to the property.

Cons

  • 20% down payment can be expensive
  • Very complex loan application and approval process
  • Requires the use of a licensed, bonded and insured contractor

 

Borrowing Credit

This might not be an option for everyone but it is a commonly used tactic to make homeownership possible. When I located my dream house I wasn’t technically ready to buy it. I’d just purchased a four unit apartment building and the strict underwriting for loans meant that I could not count the rental income on my loan application. This left a black hole in my finances even though I could in fact afford the property but due to a technicality the lenders would say no.

 

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Family to the rescue

 

I reached out to my parents to see if they would be willing to let me borrow their credit, my father would have to co-sign on the loan and be held equally responsible for the payment of it. Thankfully they trusted me and had the available credit for me to leverage. This brought the debt to income ratio of the two mortgages in line with industry standards allowing the purchase of my second property.

Pros

  • No financial cost to the credit lender, as long as you can pay
  • Allows you to boost your debt to income ratio to leverage more loans
  • A no cost way to get more mortgages

Cons

  • Credit partner will be on title and legally a 50% owner of the property
  • If you don’t pay, you will damage not only your credit but theirs
  • If things don’t go well, you’re likely to lose a friend or family member
  • MUST be done with someone you trust and have written agreements in place
  • MUST have an agreed upon timeline, exit strategy and nuclear option decided before entering into this agreement

 

Borrowing credit is an amazing way to leverage more purchasing power but it is a very high risk move if you do not have the right partner and plan set in place. You are now putting another person on title of your property and have their credit in your hands. Proceed with extreme caution and if you do have all potential outcomes discussed, agreed upon and in writing with your partner.

Two years after this purchase was completed I refinanced this property to remove my father from the loan. This was done as the rental income at my four-plex could not be counted and there was no need to tie up his name and credit to the property. It also allows him to be available should another family member need him to assist in purchasing a property for them.

 

Rent to Own / Lease Options

This is a very interesting segment of real estate; there are no real rules here. You and the owner can determine these through negotiations, the possibilities are endless. In some cases portions of the payment (rent) go towards paying down the principle or it could be lease payments on the property with an option to purchase at some time in the future.

Lease options and rent to own can be great solutions for the creative investor to own real estate. You could essentially pull this off with no money and bad credit if you wanted to, there’s not bank or structured rules. You are dealing with another human being and this means you must be very capable in negotiating and knowing what you are getting into.

There are numerous resources online on this subject and it would be wise to consult a seasoned investor and an attorney before you move forward with any lease options or rent to own agreements.

Pros

  • Can be utilized with no credit or cash
  • Terms can be negotiated between you and seller creatively
  • Possibilities are endless (terms, rate, down payment)

Cons

  • The deal relies on your ability to negotiate it
  • You could enter a very one sided contract that is not in your favor
  • Legal ramifications if contracts are not written properly

 

Compromising

This isn’t what most people want to hear but it’s the most important rule of house hunting. Whether it is for an investment or a residence you have to be aware that perfection is not just going to fall into your lap.

If you are a first time home buyer you better pay attention to this. Maybe you’ve grown up in your parents beautiful home (ask them about their first home) or you’ve been renting a hip apartment in a hot neighborhood. You are going to have to accept that if you want to own real estate it won’t be as nice or in as cool an area as you currently rent unless you are paying considerably more for it.

It takes time to build wealth, make the home yours and move up the real estate food chain to the exact type of property you ultimately want to own. It also takes blood, sweat and tears from those weekends driving to Home Depot ten times while your friends are out having fun. This is what hard work looks like but it comes with a great result, you own something.

 

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Hit rock bottom, pink eye and no hot water for two months

 

Finding that balance can be a challenge, if you know you will be living in a specific area for the long term it’s worth making the sacrifice to own real estate. Here are just a few of the creative ways to take what could stop the average person and make home ownership possible, if you are willing to work for it.

If anyone reading this needs any advice, or guidance please do not hesitate to contact me personally!

– Tim