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in Real Estate Investing, Series: Getting Started in Real Estate · August 26, 2022

How to Fund Real Estate Investments – Part 1

So you’ve found the perfect investment property, now what?! This is where a lot of investors or aspiring investors get stuck. “I want to invest in real estate, but I don’t have any money” or ” I don’t have good credit” or “I don’t know how to deal with all that bank paperwork” are among the popular responses when the question about getting started comes up.

As you may have noticed in the title of this post, I am making this a multi-part post because funding real estate deals can be broken into two categories: traditional vs creative. In this post, I will address the traditional way which is what most of us are used to. Traditional or conventional is when you have money for the down payment and go to a bank to borrow money. In the second post, I will address my favorite way of funding real estate which is via creative financing strategies.

I am going to open up by saying that I HATEEE dealing with traditional lenders. I really do and I know I am not alone. It gives me a lot anxiety, but after a few good rounds of financing, I’ve gotten better at the process and I’ve learned to anticipate the underwriters requests or how to address the requests.

As new real estate investor, you will most likely get either a conventional or FHA loan under your personal name. These are two two loan types that I am focusing on today. If you already own a home, the process is going to be very similar with a few exceptions.

The loan that you choose will likely depend on your investment strategy: a) House Hacking, b) Live-In-Flip or c) Turn-Key Rentals or d) Short-Term rentals. Note that I am purposely excluding Flips because they don’t normally qualify for conventional lending.

FHA Loans

FHA loans is the favorite loan product for investors looking to house-hack. This is because you can finance a property with 1-4 units with only 3.5% down. Basically, you can get a $200,000 fourplex for under $10k. A lot of people don’t know this. Personally, I have not used an FHA loan myself, but I have gotten one for my dad.

So, what is an FHA loan? An FHA mortgage is a mortgage insured by the Federal Housing Administration (FHA). The FHA was stablished in 1930s to make home ownership more affordable and attainable. These loans let you put as little as 3.5% and have lower credit requirements than conventional loans.

To qualify for an FHA loan:

  1. You need 580 credit score to qualify for the lower 3.5% down-payment or 500 credit score to qualify for 10% down payment.
  2. The property must be your primary and either a single-family home or a multi-family property with no more than 4 units.
  3. Your monthly debt payments need to be less than 43% of your gross income (DTI), but can go as high as 57%. How high they can go on DTI will be dependent on overall credit profile. However, this is lender specific and some lenders have lower thresholds.
  4. Your income and financial information need to be verifiable (this is where the nightmare happens)

We will discuss No. 4 in detail later on. The documentation requirements for FHA and conventional are pretty similar.

Conventional Loans

Conventional loans are loans that are not backed by the federal government unlike FHA loans previously discussed. Due to the of lack of federal backing, conventional loans have higher standards. The down payment for conventional loans can be as low as 3% for first time buyers, but generally 5%-20% is most common.

To qualify for a conventional loan:

  1. Generally will need a 620 credit score, but this may vary from lender to lender.
  2. To qualify for the lower down payments, the property must be your single-family primary residence. On average, you can get 5-10% on primary residence and 20-25% on investment properties. Unlike FHA, you will have a hard time finding a lender that will give you a low down-payment in a multi-unit property. They exists, but you will have to do a lot research and will no likely go below 10%-15%.
    • When we were looking to house hack, our lender would allow 10% for two-unit (aka duplex) multi-family and 15% for 3-4 units. Spoiler alert- We didn’t end-up house hacking.
  3. Your monthly debt payments need to be less than 43% of your gross income (DTI), but can go as high as 65%. However, this is lender specific and some lenders have lower thresholds (or higher). How high they can go on DTI will be dependent on overall credit profile. Personally, I have had lenders lend to me with 50% DTI.

Let’s Talk DTI. What is it and how is it calculated?

DTI stands for Debt-to-Income ratio. If you have been reading or talked to lenders, you may have heard the term DTI thrown around quite a bit. This is a measure that lenders used to see if you can afford to get into more debt. A lower DTI tells lender that you have income available to pay for your debts, where a higher DTI tells lenders that you have a lot of debt obligations. The higher the riskier for them. Understanding how this is calculated will help you get a better understanding of your lending profile.

DTI= (Sum of Monthly Debt Payments)/Gross Income.

For example, let’s say you make $5,000 gross income per month and you have a car payment of $300, student loan payments of $150, a mortgage payment of $1,000.

DTI = (150 + 300 +1,000)/5,000 = 29%.

Now, there is also something called Front-End DTI. As if this wasn’t already confusing, right? The front-end DTI will take only your housing monthly payments. The difference between front-end and back-end is that the back-end will include all of your debt payments, not just housing.

When it comes to front-end DTI, lenders usually prefer to be between 28-31%.

How do you get your Monthly Payments to calculate DTI?

Ideally, you would have a budget with your monthly payments and have this readily available. However, usually what I do is get the information directly from the credit bureau. Experian.com has a free account option that lets you monitor you credit regularly. What better than getting it straight from the source, right? Using their credit report, I get the monthly payment amount for all of my debt account with balances as shown in the credit bureau report. This is exactly what your lender will do on their end. They will count your monthly credit card payments as well. If you are carrying a small balance or something, better to pay it off.

What is counted as gross income?

If you are salaried, gross income is easy to calculate. They will use your current salary divided by 12 and that’s what they will use to calculate DTI. However, what if you are not salaried?

If you are an hourly full-time employee, the lender will use your current hourly rate to come up with annualized wages using 40 hours per week and 52 weeks. Calculated as follows: Hourly x 2080 hours (40 hours x 52 weeks) divided by 12. For example, if you make $20/hr then ($20 x 2080 hours=41,600) divided by 12 would be $3,466 per month.

If you are an hourly part-time employee, they will use paystubs to come up with an average number of hours worked per week. Then calculate same as above (Number of hours worked x 2,080 hours).

What if you are self-employed or 1099? Get’s a little bit tricky because lenders want to see 2 years of consistent income as a self-employed individual or contractor. This also applies for commissions, etc. Sometimes employer pay commissions on 1099 and that won’t get counted unless you have the two years (it happened to my dad). Of course, lenders can make exceptions given specific programs or based on a great credit profile.

Documents you will need to provide for application:

  • Application: Each bank has their own application format, but most information is the same. Basic information such as name, address, rent/mortgage amount, salary, etc. You may also be asked to sign disclosures and other consent forms.
    • Income Verification: If you are taking a loan under your personal name or with you as the guarantor, you will be asked to supply proof of income. This is usually verified with Paystubs and tax returns. If you are self-employed, most lenders will be looking for two years of income reported in Schedule C for the same type of business. With Self-Employment income, they will usually average out the two years. There are some programs out there for self-employed individuals called bank statements loans which are a bit more expensive, but useful for anyone that hasn’t met the two year period as self-employed. Lenders like easy, so paystubs is their preference.
      • Rental income is normally verified with leases, but you may be asked to provide proof of rent payment collections. For rent collections, I would normally provide the business bank statement. Even if you don’t have an LLC, you should still have a separate bank account for your rentals. If you don’t, shame on you. JK 😉
    • Debt Listing: Most lenders will use your credit report to obtain this, but some others may ask you to list all of your debts and all of their monthly payments. It helps if you use something Mint or Personal Capital to track your accounts. You can also use the Experian.com credit report mentioned above.
    • Real Estate Owned: If you own one or more properties, they will ask for the addresses, the rental income (if applicable) and the mortgage information (monthly payment and whether it is escrowed).
      • If you are using a conventional lender (Fannie Mae type product), they will likely ask you to submit your latest mortgage statement (for each property). If you have multiple properties, this is a pain.
      • If you need to use any of the rental income to offset your DTI, they will likely also as for leases. Depending on the lender, they might not count month-to-month leases so keep that in mind.
    • Cash Sourcing: This is an area where we have personally messed up several times. Lenders will ask for two or three months worth of bank statements showing where the down payment funds are coming from and to verify that you did not borrow the funds. You want to make sure that you don’t have large deposits that cannot be explained because underwriters will be asking a lot of questions and requesting support. For example, in one of our recent closings, we sold a car and were using those funds as down payment so underwriters needed to see the bill of sale to confirm the source of the funds. Do not deposit any borrowed funds to the same account that you are using for your down payment.
      • Side Note: After my first cash sourcing nightmare, I ended up opening several personal bank accounts: Income Account, Bill Account and Household Account. The “Income Account” is for just for any personal income like payroll direct deposit or bonuses so there isn’t much activity beside intra bank transfers. The household account is used for all other deposits and transactions including personal loans and business transfers. Ryan and I jokingly call them the clean money and dirty money account :). In all seriousness, loan underwriters will get confused if you have too many zelle transfers or large outgoing transactions. At one point, I had to explain a large refund.
    • Personal Financial Statements: Not usually requested for Fannie Mae/Freddie Mac loans, but if you are working with a community bank and for a loan on an business name, then you’ll likely be asked to complete a Personal Financial Statement (PFS). Each bank has a different format, but overall is the same information requested. This is also known as your Net Worth Statement which includes a list of all Assets (everything you own) minus list of all liabilities (everything you owe). Banks are usually looking for a positive net worth, but doesn’t mean they won’t let you if you have a negative. This is where an app like Mint or Personal Capital come in handy as well.

I hope this helps. Please feel free to reach out to me via Instagram @beyondjustnumbers or leave a comment below.

Bonus

Want to find small community banks? Go the small bank directory —> ICBA.ORG

Don’t know what to ask? Here are some questions I ask lenders when shopping around —> Lender Questions

This post may contain affiliate links. I may get commissions for purchases made through links in this blog.

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New Blog Post 🚨 In this week’s blog post I am New Blog Post 🚨 In this week’s blog post I am going over why we bought a short-term rental, our experience so far. Plus what we did prior, during and after purchasing our first short-term rental in March 2022, a Cabin in Blue Ridge, GA.

Check it out at www.beyondjustnumbers.com or link in bio @beyondjustnumbers
I can’t stress this enough. Some investors are l I can’t stress this enough. Some investors are looking to make money from day one, but that’s not always the case. It wasn’t for us and I’ve talked to a lot of rookie investors who have told me “Thank God I have my personal finance situation together.” 

This is just my opinion. Do you agree? Let me know in the comments!

Want to join a free community of like-minded individuals? Join our REI Coffee Chat Community where we talk real estate investing, personal finance and financial freedom, and much more! Link in bio @beyondjustnumbers

Want to learn more about investing in real estate? Read my blog www.beyondjustnumbers.com

#realestateinvesting #realestateinvestor #creativefinancing #investmentproperty #buyrealestate #firemovement #debtfreejourney #financialindependenceretireearly #rentalproperty #investinginproperty #personalfinanceblog #wealthbuilding #planforretirement #investorlife #livefree #airbnb #moneyisfreedom #enjoythejourney #reicommunity #realestateinvestments #shortermrentals #cashflow #realestate
I used to think that investing in real estate was I used to think that investing in real estate was for the rich. I became in love with real estate while working for a real estate investment company that owned hundreds of units. This was back in 2011 and I was 20 years old at the time. I had less than 5 years permanently living the US, so I had no idea about anything. I grew up in Colombia and the only talk of money we ever had was the lack of it. 

The investors I worked for were a wealthy family, so naturally, I thought… Real Estate requires wealth. I don’t have wealth. Therefore, I cannot invest. 

I figured… well shit, I need become wealthy so I can invest in real estate. Eventually, after educating myself I realized how wrong I had it. You can build wealth BY INVESTING in real estate.

Took me a couple of years to figure it all out. Hence, why I didn’t start investing until 2019. I wish I had figured out earlier, but it is what it is. In just 3 years of investing in real estate, I was able to accumulate more wealth than I ever thought possible. 

Just to give you an idea…Did you know you could invest in real estate with as little at 3.5% of the purchase price? For a $150,000, that’s only $5,750. Buy a duplex that needs a little bit of work, fix it up, rent one side and live in the other. This will reduce your monthly expenses significantly, save the money and do it all over again.*

Of course it’s not that simple, but it’s also not that difficult. There are some particular steps and considerations which is  why I recommend doing further reading on the subject. 

Book Recommendation:
✅“The House Hacking Strategy” by Craig Curelop and ✅“Investing in Real Estate with No (and Low) Money Down” by Brandon Turner. 

#realestate #realestateinvesting
🚨 New Blog Post! Continuing the “Getting Star 🚨 New Blog Post! Continuing the “Getting Started in Real Estate Series” 

You’ve found a property either on your own or through a realtor, you’ve run your numbers, you’ve got a lender and now you are ready to make an offer. What’s next?

In this post I want to discuss a few items:

✅Key components of a real estate contract
✅How do you make a compelling offer to ensure you get the property you want
✅The main contract contingencies and how they work
✅Communicating with your realtor

I also provide real examples of what we have done personally. 

Check it out at www.beyondjustnumbers.com

Let me know what you think!
If I listed all of the hats, I’d never end 😂. If I listed all of the hats, I’d never end 😂. Anyone else? Show me the multiple hats you wear and tag me. Let’s have fun with some reels.

Trying to get good at the real game like @investinginyourwealth. How did I do?
The fact that you are not where you want to be doe The fact that you are not where you want to be doesn’t mean you won’t get there. Greatness takes time. Focus on what you control.

And remember, it’s okay to pivot.

#mindset #realestate #firemovement #realestateinvesting #realestateinvestor #rentalpropertyinvestor #rentalproperty #cashflow #motivation #financialfreedom #financialindependence #financialindependenceretireearly
We see a lot of advice around hiring a real estate We see a lot of advice around hiring a real estate friendly CPA. However, when you look up  CPAs that specialize in real estate, they can be pricey.  However, that doesn’t mean that other CPAs or tax professionals aren’t good. They might not be particularly aware of certain items, but they can research and collaborate with theirs peers. Perhaps it may require you to do a little of work to compensate. Things you can do:
✅ listen to The Real Estate CPA podcast or join the Facebook group
✅follow social media accounts of the pricey Real Estate CPA and take notes of what they are saying
✅attend free educational events 
✅read BiggerPocket book on Real Estate taxes 
✅if you know anyone working with a really good Real Estate CPA firm, ask them what they are doing

Then use that to go your CPA or tax professional and be like “Hey, is this something we can do for me?” They’ll probably say, “Let me look into it”. 

If they are good, they are going to research it and/or ask their CPA peer group. (CPAs and tax preparers also have Facebook groups where they collaborate with each other).

Here is a piece of advice, if they tell you “No, we can’t use this loophole or no, you don’t qualify to use this strategy” —> Ask WHY and “How can I qualify in the future?.” This way you confirm they did their homework and aren’t just being lazy. Don’t just take no for an answer. You can then get a second opinion by asking a question in a forum or to your peers.

So don’t panic if you don’t have a real estate CPA or tax professional. 

Next video I’ll be answering the question… “Can I skip the tax professional altogether and do my own taxes?”

#realestate
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