how to buy a house

[Spaazkaz]

Im 22 years old and Id like to buy a house/property to rent out within the next 5-10 years. I dont even know where to start. I guess I have to work on getting a steady income and building my credit so i can take out a loan to pay for the house that i will payback with the income? I probably need more equity than cash and a car? How much is generally needed up front to buy say 250-350,000$ house? I could go half that in my area but im thinking big. Any input would be much appreciated. Thanks, -Zack-

[gofrugal]

now a days you would need 20% down + closing cost

[ltressel]

Im 22 years old and Id like to buy a house/property to rent out within the next 5-10 years. I dont even know where to start. I guess I have to work on getting a steady income and building my credit so i can take out a loan to pay for the house that i will payback with the income? I probably need more equity than cash and a car? How much is generally needed up front to buy say 250-350,000$ house? I could go half that in my area but im thinking big. Any input would be much appreciated. Thanks, -Zack-

Zack,

You already answered your question.

[ltressel]

now a days you would need 20% down + closing cost

True, in some cases. However, with decent credit and a steady job, there are FHA loans that only require 3% down.

LT

[BusinessAdviser]

I wouldn't bank on 3% down though. With the crisis in the lending industry, I think you'll likely need more down.

[Spaazkaz]

Zack,

You already answered your question.

ok, so can anyone refer me to some sites/sources? how shall i go about this? What other kind of equity should i have? just money in the bank? Who should i talk to and what should i know. I appreciate your help guys. These forums are great. -Zack-

[adonis.chan08]

with the market now and days who knows. But lender never lend out 100% no more. Most likely you will need atleast 20% down+ closing cost. for instance if your house is going to cost 500k you will need at least 100k to put down. and if you can only put down only 50k then you can do something call a 80 10. for example. they will give you 80% loan and a 10% line of equity. so your 30yr fix or what ever you choose will be 6.75 apr and your 10% fix will be 7.75%...... just watch the market and invest wisely..

[ladyk5]

Well I have purchased investment property and I can tell you there is no way you will get a loan for investment property with 3% down. Although 80-10-10 loans are somewhat typical if you only have 10% down but that is not always the case. Sometimes you purchase an investment property with just 5-10% down and not necessarily have to finance another 10% it really just depends on the bank you use (mine didnt require that). I only put down 10% and they accepted it because I had good credit--I could have put 5% but it would have been a higher interest rate. I also rolled the closing cost into the loan and financed it. Your apr will ultimately depend on your credit and credit history so if your goal is to do it several years from now it would be wise to start building and maintaining good credit now. I try to find property that is undervalued and will return 150% or more of the mortgage. For example if you have a mortgage that is $1000 then you want to be able to rent it out for about 1500. Currently the property that I have is gaining about 225% of the mortgage and the down payment I made has already been recouped.

If you are buying multifamily property of 2-4 units and you plan to live in one unit you can get a residential loan (this will qualify for 10% down) but if you dont plan to live in the property or you want more than 4 units then you will be looking at, at least 20% down. so keep that in mind. Also I would advice getting expensive property for the sake of getting it, some times the cheap or less desirable places can be valuable also and produce a great deal of income because everyone needs a place to live also like adonis pointed out the higher priced the property the higher the down payment and the higher the closing cost, realtor fees, etc (not to mention insurance, taxes, and maintenance cost).

Finally I would advise reading up on the subject, Rich Dad Poor Dad, Secrets of a Millionaire Real Estate Investor, Secrets of a Millionaire Real Estate Developer, Making Money with Fixer Uppers and Renovations, The Beginners Guide to Real Estate Investing, The Automatic Millionaire Homeowner

All these books have a lot of valuable advice and i highly recommend them

Hope this helps

[KKoher]

You need 20%, and ussualy a credit score of atleast 660, they also look at your debit vs. income. Make sure you are paying off as much as you can on credit cards, and other loans you may have.

[rogercbryan]

with the market now and days who knows. But lender never lend out 100% no more. Most likely you will need atleast 20% down+ closing cost. for instance if your house is going to cost 500k you will need at least 100k to put down. and if you can only put down only 50k then you can do something call a 80 10. for example. they will give you 80% loan and a 10% line of equity. so your 30yr fix or what ever you choose will be 6.75 apr and your 10% fix will be 7.75%...... just watch the market and invest wisely..

This not correct. Lenders will still loan 100% as long as you have a low income to debt ratio and excellent credit. This is not always the case but it is still common.

I already own one home and have a DTI of under 10%. This allowed me to secure a $275,000 loan at 5.75% just last week. This is a 100% loan... now I will have to pay PMI on the loan... but it is still possible in some situations..

*** I wanted to add this.. if you can come up with a down payment your 'business' will be much easier to manage. You'll be able to turn a profit from your property when you rent it.. which is a good thing. I'm in no way endorsing 100% loans.. as they are not the best idea for everyone..

[rogercbryan]

Im 22 years old and Id like to buy a house/property to rent out within the next 5-10 years. I dont even know where to start. I guess I have to work on getting a steady income and building my credit so i can take out a loan to pay for the house that i will payback with the income? I probably need more equity than cash and a car? How much is generally needed up front to buy say 250-350,000$ house? I could go half that in my area but im thinking big. Any input would be much appreciated. Thanks, -Zack-

You use of the word equity in this sentence confused me a bit. Banks are going to want to see cash in the bank. The more you have and the longer it has been there the better. When doing rental properties a good gauge is 20% if you can come up with it.

*What did you mean by equity in that sentence?

If this will be your very first house that you are buying then you can purchase it as your primary residence and then still rent it out. It is much easier to get a bank loan on a primary residence then it is on a rental. As long as you get a traditional loan then bank wont even ask what you are going to do with the house. Be careful with using special programs like FHA or first time buyer programs if you do this as many of those loans have clauses against non-owner occupied deals.

[rogercbryan]

ok, so can anyone refer me to some sites/sources? how shall i go about this? What other kind of equity should i have? just money in the bank? Who should i talk to and what should i know. I appreciate your help guys. These forums are great. -Zack-

Do a Google search for
first time home buyer
buying a rental property
FHA loans (in your state)

These search terms will yield you all the info you need. I have some experience (and there are others on YE) who have experience in this industry so if you have any questions feel free to post them in the forums.

[DPayne]

I always recommend 20% down of the purchase price as a down payment. I know you can get financing with less than 20% down, but to me if you are keeping this house for any amount of time, 20% is your magic number. It does several different things for you. First of all it allows you to avoid paying PMI every month. PMI is basically lending insurance that you must pay if you have less than 20% down because you are considered to be a higher risk of defaulting on the mortgage.

20% Downpayment also allows you to get a better interest rate (in most cases). If you plan to follow a standard 15 or 30 year amortization schedule, a drop in interest rate can save you a bucket load of money over the amortization schedule.

I think THE MOST important reason for 20% down is it gives you "wiggle room" in case things turn sour. Say you lose your primary source of income and get behind on payments. If you need to unload the real estate QUICKLY to avoid foreclosure and pay off the debt, you can market the property for 80% Fair market value and someone will scoop it up. You may say "I would lose my equity in the deal." Well losing your equity is better than losing your credit. If you foreclose on a property it will take you 5-10 years to sort it out and you'll see a 200-250 point hit on your fico score. This could ruin the next couple of years of your life. Your exit plan on any investment is the most important part.

As mentioned above, check out your FHA loans and other first time homebuyer loans. Some of my clients who buy properties that need rehabing to be "rent-ready" have purchased the property with "Hard Money" and refinanced once the rehab was done. A Refi where you name rate and term is a lot easier than the original approval.

Hardmoney lenders lend you money based on the property value, not your personal credit (in theory, although your credit is highly important). Beware, hardmoney tends to come with some steep fees and interest rates (because it is designed for short term flips).

Just a word of advice. DO NOT buy a house for an investment at retail price. NEVER buy investment properties at full market value. NEVER NEVER NEVER. You need to find sellers who NEED to get rid of the property and shoot for 70% market value. IF you can get a property for 70% of its value and put 20% down on that loan, you'll have around 35-40% equity in the property at closing. That is in a good position to be. This allows you to make money if you sell the property at market value.

DO NOT let emotions get involved in a deal. This will screw you over. If the numbers don't look right, who cares how much you like the backyard. That backyard will become your hell if you structure this deal wrong. Trust me.

Avoid ARM's (adjustable rate mortgages) like the plague. These subprime lending products are partially to blame for our jacked up housing market of today. You want a 15 year fixed rate mortgage.

If you don't have 20% down, rent until you save it up to have it. This is your magic number, dont let mortgage brokers talk you into some stupid setup. Remember they make their money by issuing mortgages. Always remember peoples motives to their suggestions when doing business.

I Just thought I would add some knowledge here. Sorry if the post is a mile long!

[jasaunders]

Avoid ARM's (adjustable rate mortgages) like the plague. These subprime lending products are partially to blame for our jacked up housing market of today. You want a 15 year fixed rate mortgage.

Most of your advice was good until you made the above statement. ARM's are not a subprime lending product. There are many prime ARM's that are given out, and prime ARM's have not seen a drastic jump in foreclosures.
However, ARM's are more dangerous if you don't know what you are getting yourself into. Subprime ARM's are having a much higher foreclosure rate than subprime fixed loans. But if you are in the subprime category to begin with, you should worry about fixing up your credit first, before you even think about buying investment property. And a 15 year fixed isn't for everyone, it depends on your individual situation.

And IMO, if you can't put 20% down on a property, you can't afford it and shouldn't buy it. You shouldn't go with an 80-10-10 or 80-15 or interest only or anything else if you can't afford to put down 20%. That's exactly the problem now; people couldn't afford to put down 20% on their homes and suddenly when prices fall, they have no equity in their house and they owe more than it's worth.

In addition, one thing that I don't think anyone mentioned in this thread and people tend to ignore when talking about investment property (your boy RK conveniently ignores it often too). You should have at least one years savings before you buy and try to rent out an investment property. All too often people think it's as easy as buying a property, renting it out, and in comes your positive cashflow (RK sure makes it that easy). What happens when you have a tenant who stops paying rent? Sure, you evict them, but the eviction process takes time. What happens when tenants cause significant damage to the property? Or something on the property breaks down and needs repair, like a new water heater, air conditioner, or the roof? Or what happens when you can't find tenants to occupy your property? You thought it would be easy to get people to move right in; sometimes its not so simple and you might be going months with no tenant. Or rent prices drop in your area because of the local economy. Many things can happen; you need a cash reserve to be able to absorb these problems.

[rogercbryan]

There is a lot of good information in their thread.

Savings: A good point was made- if you can’t cover at least six months (one year was posted) of your payments then you should not be considering a rental property at all. You will run into problems. Your renter could pay late (or not at all). You could need a major repair.. you get the picture.

ARM’s: The news has managed to give a warped perception of this great tool. As a previous poster stated that there are prime ARM’s which can be useful in many markets. If you think housing is at a bottom and that interest rates are going to continue to fall then an ARM would be a great investment tool. (I’m not saying that housing is at a bottom nor am I saying that rates are going to continue to fall).

PMI vs. Down Payment: I’m in a unique situation where I have plenty of cash and good credit yet I have to leverage property. Why? My company is less then two years old and is growing extremely fast. I need to keep every penny I have in my company so that I do not handicap myself if a major account comes up. The banks that I work with see this in my business accounts. So when I say that I was able to get a 100% loan that is the reason.

If I could take out the cash to use as a down payment I totally would. PMI is a drain on the profitability of any rental investment. If you do not have cash on hand for emergencies then I also like a previous posters comment that if you can not put 20% down then maybe you should not be buying.

*I’m not a big fan of the words never and can’t in any aspect of business. My original post on this thread was about the ability to get 100% financing.. someone said you can’t do that… I was simply pointing out that you can (in certain situations).