? about financing our first rental house - Posted by Christy

Posted by Sean on September 10, 2001 at 11:59:11:

If I understand your position you have the ability to purchase a house all cash without involving a bank.

This puts you at a tremendous advantage in regards to other buyers in the market. You can walk up to a Seller - a motivated seller - and offer to purchase their house and have them their money in 48 hours. All of the Seller’s problems will be resolved in a blink of an eye (in real estate terms).

With other Buyers the Seller will have to live through 30-60 days of hoping the Buyer will be able to qualify for the loan and that all the cards will fall into the right place. That’s pretty stressful for someone who is going through a divorce, foreclosure, job transfer or whatever.

I suggest that you take your large cash position and make offers on property at large discounts in exchange for a very fast close with no contingencies. Ideally you should be able to purchase properties for 80 cents on the dollar. After the sale you should be able to refinance the property and pull as much cash as possible out to repeat the process. Some banks (although they are hard to find) may be able to refinance the property for the full amount of your purchase price immediately. Other banks may require that you wait a year before they’ll accept an appraisal for larger than the purchase price as valid.

? about financing our first rental house - Posted by Christy

Posted by Christy on September 09, 2001 at 17:41:19:

I just found this site today, though we are already in the middle of a transaction for a home (2 ½ weeks 'til closing). Real estate investing takes such a different
kind of thinking than the way we think to handle our personal finances. The only debt we’ve ever had was our home, which is paid for; we have never financed
a car and we pay off our credit cards every month. We are planning to rent our current home and are getting a primary residence loan on the home we are
purchasing. We are doing this b/c we’ve had other investments which have taken terrible hits in the equity markets, and this money is from a medical settlement.
Our medical bills (out of pocket) were over $14,000 in 2000. We have a good chunk of money in a capital preservation fund, which at least protects the
principle, but the earnings are poor. We knew we must do something to provide for future medical expenses, or eventually we would not be able to handle the
medical bills.

We have no idea how much to put down on this house, or how many points to pay, or how long of a loan to take on the house. Some financial people we’ve
talked to say we should leverage as much as possible; others say to own as much equity as possible (which I would agree with if we weren’t investing, but we
already own 100% equity in our current house). Part of me thinks we should do this differently and put down as little as possible, in order to give us more $ to
gradually buy more homes, but with the health problems here we could not put enormous amounts of time into this. Yet realistically I can seeing getting at least
one more house within the year.

We could pay for the house outright, but we really need to have liquidity for medicals and for college which is coming up for two kids in the next 1- 7 years. If
we put down 5%, we would get a first and second mortgage in order not to pay PMI. The rent from this house will be $985/month, and the purchase price of
the house is $127 K, so the first mortgage would be for $101,600. We would like the rent to cover the mortgage payments, but maybe that is not essential? If
we took a 30 year loan, we could make an extra pmt. every year and cut the mortgage down to 17 or so years, I understand. But is that better than taking a
shorter loan? And is it better to pay more points that are tax-deductible, with less down payment that is not tax-deductible? I am totally confused about this.
We would tremendously appreciate it if anyone could come up with a sensible financing plan for us that would explain all the pros and cons of the different
options. Thank you so much.

(I think I made a mistake by first posting this under the financial forum when I should have posted it here.)