This week’s question comes from Mack through Ashley’s Slack channel in the Real Estate Rookie Bootcamp. Mack is asking: How can I buy an investment property without putting 20% down?
If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).
Ashley:
This is Real Estate Rookie Episode 142.
Ashley:
My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.
Tony:
And welcome to the Real Estate Rookie Podcast, where we break down all of those burning questions that rookie investors have, give you our best answers that we’ve got, and sometimes we bring on other guests to answer those questions for us, but today you get me and Ashley going deep into the psyche, into the questions that our rookies have and hopefully giving you guys some value.
Ashley:
Today, we are actually pulling our rookie reply question from the bigger pockets, Rookie Real Estate Bootcamp. So, we have one of the members that had asked a question in the Bootcamp in the Slack channel. So, if you are unfamiliar, I host a Real Estate Rookie Bootcamp, where we learn how to get comfortable and confident in getting your first deal in 90 days.
Ashley:
So, today’s question is coming from Mac Fields, and he posted this in slack: Hi, all. How can I buy an investment property without putting 20% down on a triplex? I already have an FHA loan. I was thinking about refinancing it to conventional. However, I was advised if I tried to get FHA on an investment property that I would be flagged in underwriting since I have a big family. I’m trying to stay away from partnerships and a hard money lender. Any suggestions would be greatly appreciated.
Ashley:
So, first, one of the other members, Wendy Al, she actually already commented to respond to Mac and said: My bank let me put 15% down on an investment property, but it was for single family home. I would check with your bank.
Ashley:
So, the first thing I see there, is that there are conventional loans that are doing 5% down right now. That’s actually my sister trying to look for her next house hack, and she got pre-approved for a conventional, just so she doesn’t to go through the FHA inspection and all the hassle that comes with getting an FHA loan compared to a conventional loan.
Tony:
Ash, let’s break that down. What is the difference between FHA and conventional, for those that aren’t familiar?
Ashley:
Yeah, so FHA loan is only available if it’s going to be your primary residence. You can only have one FHA loan in your name, as Mac had mentioned, and it is typically a low interest rate and a low down payment between 3.5% and 5% down. With a conventional mortgage is, it can be an investment property, it can be your primary residence. Usually it’s a higher down payment, but there are some conventional mortgages now that are allowing only a 5% down payment.
Ashley:
So, if your down payment is less than 20%, you still are paying that PMI, that insurance premium, every single month with your mortgage payment, until you get over that 20% threshold and have at least 20% equity in your property, then you can request to have that PMI removed or refinance out of the property.
Ashley:
But with the FHA loan, you have to have an inspector come out to the property you are purchasing before you close on it, and they just make sure everything is up to code in the property, that it’s habitable. They can be nitpicky. I remember when my cousin did her FHA loan, she had to go and install a railing on some stairs to the basement or something like that and the seller wasn’t willing to do it, so she had to have her dad and brother go over and do it.
Ashley:
But with the sellers, especially in this market right now, sellers have a lot of options usually to choose from, and they’re most likely going to pick an offer that doesn’t have that FHA inspection attached to it, because the deal could fall through if it does not pass the FHA inspection.
Tony:
That was a wonderful break down, Ash.
Ashley:
I’m helpful.
Tony:
Super, super thorough. Yeah. My first question to this listener would be… I guess a comment and a question. My first comment is, I think for a lot of rookies, real estate investors in general, that when we get one or two nos, we shut down our creativity or what we think is possible. So, just because one or two banks have told you that it’s not possible, it doesn’t mean that there’s not some other lender out there that could find some kind of loan product, or has some kind of loan product, that better suits what your goals are for this property.
Tony:
So, I think my first piece of advice would be to talk to more real estate investors in your market, in your area that you know, that you like, that you trust, or even that you don’t know. Get on the bigger podcast forums and just start asking around and see if anyone’s done something similar to what it is you’re trying to do. And I can almost guarantee that someone’s probably gone down the same path and has found a solution that might work for you.
Tony:
I had gotten stuck on trying to finance a property that we were purchasing, and through conversations with other real estate investors that I know, I got connected to a bridge lender that I think might be able to help us get this deal done. So, I think that would be my first point of recommendation for you. The second thing I would say is, he didn’t quite say what the business plan is for this property. Will there be rehab? Is he able to purchase this at a discount? And does he plan to increase the value by renovating the property?
Tony:
Because if that is the case, I would also question why hard money isn’t an option for you? If you’re buying this at a 60% discount and you know you can put in 10, 20, 40, $50,000 and increase the value 3X, why not leverage hard money then? And then you’re really doing well on the financing side, because you’re getting all of your capital back, hopefully. So, I think just two questions, he didn’t give us all that information, but just things to think about in case those are options on the table for him.
Ashley:
Yeah, and one thing he did mention, was that he would get flagged by FHA on an investment property in underwriting, since he has a big family. So, I am not exactly sure what he meant by that, but for FHA, it has to be your primary residence. So, if he was not intending to move into this triplex, then it would definitely get flagged, and it would be illegal if you said that you were going to live there and you actually weren’t going to live there.
Ashley:
So, that’s a big difference to know too, is that, to use the FHA, you have to live in the property. So, if he was going to live in one of those three units, that would be fine. And then he can rent out the other two, then he could use the FHA loan. So, I’m not sure exactly, Mac, and I will message you on Slack to get some more clarification and help you answer that. But if it is just going to be in investment property and just talk to the banks around you, that have options, just like Wendy said, she got 15% down on an investment property that she’s not going to be living in as her primary residence.
Ashley:
And then also, another thing too, is if Mac has equity in that property, he could get a line of credit in the property he’s living in now too, to use as some funds to purchase another property.
Tony:
Yeah, that’s a fantastic point, leveraging the existing equity that he has to help fund this. I feel like a lot of people forget that they, especially now where we’re at in the market cycle currently, there’s a lot of people sitting on some equity. I think the last thing that I would add, Mac, and this only works, again, if you plan to live in one of those units, but there is a program, a company called NACA. It stands for Neighborhood Assistance Corporation of America, if I’m not mistaken.
Tony:
But if you just look up NACA, I know investors that have used their loans to purchase house hackable properties. It’s a conventional loan, but it’s zero down, always. There’s no down payment associated with it. They cover the majority of your closing cost. And the interest rates are typically a point to half a point lower than where traditional primary residence interest rates are.
Tony:
Now, it is an absolute beast to get approved for this loan. The number of steps they make you go through and believe me, I know because I tried. We tried to do this for my primary residence, but we ran into some issues, because there are some other limitations around purchase price and things like that, so you can’t go above the median purchase price in a specific zip code. But if you’re able to satisfy all of their conditions, you get an absolutely amazing, amazing, amazing loan product for almost no money out of pocket. So, just last thing, if you plan to live there, look up NACA and see if it’s an option for you as well.
Ashley:
Okay. Well, awesome, Tony. Thank you guys so much for listening to this week’s Rookie Reply. I’m Ashley at Wealth for Rentals, and he’s Tony at Tony J Robinson on Instagram. Make sure you guys check out the Real Estate Rookie Facebook group and also our YouTube channel, Real Estate Rookie. We’ll see you guys next time.
