REAL ESTATE

How to Avoid High Down Payments

17


One of the biggest hurdles to rental property investing? High down payments. Most lenders want you to come to the table with twenty to thirty percent down, but with home prices averaging around $400,000, it might not be easy to come up with $80,000 to $120,000 on your next deal, especially with today’s high cost of living. So, how do you skirt the high down payment requirements while still locking up solid real estate deals? We’re showing you how in today’s Seeing Greene!

First, a Hawaii investor struggles to scale his real estate portfolio with the state’s significant down payment requirements. David and Rob give him some creative ways to still get deals done. A median-income-earning new investor wants to know whether to buy a new construction home or BRRRR his way to wealth. Then, we debate whether a high down payment with cash flow beats a low down payment with negative cash flow. Looking for a better interest rate on your next deal? We’ll share the seller finance strategies you can use to buy off-market properties, plus whether or not you can buy two houses at once with the same preapproval.

Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can jump on a live Q&A and get your question answered on the spot!

David:
This is the BiggerPockets Podcast show, 9 61. What’s going on everyone? This is David Greene, your host of the BiggerPockets podcast here today with Rob Abasolo with a Seeing Green episode where we arm you with the information that you need to start building long-term wealth through real estate today. In today’s show, we’ve got some amazing fire questions that you are going to love as well as some high energy and some wise insight. We’re going to be talking about if you should build or bur your first duplex, how to approach an out-of-state investor that owns rentals in your area that may not want ’em the right way to negotiate seller financing, how much house you should buy, what you can do to save more money, how that money should be spent, if you should always put the biggest down payment possible or not, Hawaiian real estate and more.

Rob:
We also cover how much of a softie I am and maybe how landlording isn’t cut out for me or maybe how I’m not cut out for Landlording.

David:
If you would like to be featured on seeing Green, head over to bigger p.com/david where you can leave your question and make sure you subscribe to the show if you like it. All right, let’s get to our first caller.

Justin:
Hey David. My name is Justin Ossola. I’m from Annapolis, Maryland. Head. Quick question for you about the SDR market. I know you do a significant amount of investing, especially in luxury parts of the country. That’s what I do as well. I’ve got two investors that I work with. They’re my brothers. We just purchased two luxury condos in a pretty high-end part of the country. Cashflow positive, phenomenal investments. We’re really excited. We want to acquire more. The only problem is that in this market, pretty much the only way to get a lender through a local lender and they require 30% down payment, which is very steep, and we are limited to the amount of properties that we can acquire by the amount of cash reserves that we have. So we could probably continue going down the path of picking up two, three, maybe four of these every year given the cashflow that we’re getting from the two that we just purchased, as well as our own cash reserves. But I wanted to ask you if you had any recommendations for how we could acquire more properties for less. Down 30% is pretty steep. Are there other lending options that I’m not thinking about? I do have a broker. I’ve asked him this question. He’s kind of stonewalled me and typically when that happens, I’ve learned that I’m just not asking the right person. I know you’re an expert in this space in luxury s str, so I thought I’d ask you any help you can provide would be great. Thanks a lot.

David:
Yes, yes. Justin. I am the expert in luxury sts. I’m actually the expert in luxury everything. Rob himself would tell you I have, I sit on a throne of the imported ivory with the finest meats and cheeses in all of the land surrounding me. Just kidding, Rob. Oh, let’s get into it. Justin, first off, I’ll give my thoughts and I’ll let Rob weigh in with his. I don’t know that it’s terrible that you got to put 30% down to buy real estate. It sounds terrible to us because we’re used to 20% being a lot and thinking we should get away with three to 5% down, but that’s not normal in most parts of the world. Do you want to buy real estate? You do need money to do it, and I do think this is becoming the new normal, which is why so much of my advice has been around starting a business, saving your money and making more money so you have more money to put into the real estate that you’re going to buy.
It is true that you run into these issues with Hawaiian real estate in particular where you have to use Hawaiian lenders. In fact, as you mentioned, I did buy two luxury condos out there and I would’ve bought so much more. Rob, you would’ve loved the situation I was in. It was during Covid and Hawaii had stopped people from traveling into the state and no one knew how long this moratorium was going to last. So they’ve got these condos that were selling for half a million. Well, they were listed for like 700. I was writing offers at 500,000 and I was getting counters and I was putting ’em in contract at like five 50. The problem was it took so long to close with these Hawaiian lenders that 90 day escrows took place and by the time I finally closed and wanted to go buy more, they had opened up the moratorium.
People were traveling back to the state and you weren’t able to get these crazy good discounts from short-term rental owners that were bleeding. They couldn’t fill their units. So yeah, it’s normal. It has to do with Hawaiian laws that want to protect Hawaiian residents. They want to keep the business in Hawaii, so if you’re a mortgage broker out there that you have to actually be on the island for a certain period of time before outside brokers can use you. And most of the time, especially with these condos that they’re in, what they’re called as AO aos, which are kind of like HOAs in Hawaii and lenders won’t lend on those unless it’s these specific Hawaiian banks. So you’re kind of stuck with that scenario. I don’t think you’re going to get around it. One option would be raising private money, putting that into buying the property and just paying out some dividends, the people that you borrowed the money from. The other is you could look for some DSCR lenders that may be lending in those areas. I am betting you could use that. I don’t know if they’ll work within the AO aos. Those can be tricky. What are you thinking, Rob, when you hear about this dilemma?

Rob:
Well, I think 30% is high and just like he said, it is going to stop him from being able to buy more properties because I think if you put 30% down on two properties, that’d be the equivalent of buying three properties with 20% down. I mean obviously there’s a few more nuts and bolts there. It’s not exactly, it doesn’t exactly work out that way, but I guess first and foremost, I’m going to say maybe explore a different market. I think that’s a big, very prohibitive to have to put down 30%, although it would make you cashflow better, but your cash on cash return would probably go down quite a bit. If you had to put an extra 10% down on a luxury property B, option B, that is, I would probably try hitting the phones and maybe doing some seller finance. I think this is probably the most underrated aspect and the most underrated way to acquire properties.
You could get away with putting down anywhere from zero to 20% with the seller finance deal. I’m not saying it’s easy. If it was easy, everybody would be doing it, but if you were diligent with it and you were making phone calls and you were calling agents on properties that have been listed for like 60 to 90 days, you could have some success there. I’ve locked down a couple of seller finance properties. I love them. They make me question whether I want to use a bank ever again because it really is a much simpler process. But I mean, I would explore a different market or I would maybe try doing some seller finance at the end of the day

David:
Or maybe build your portfolio where you’ve got some stuff going on in Hawaii and then you’re balancing that out with some stuff in different parts of the country. And here’s why I say that. Hawaii is what I call a high risk, high reward market. Now, the property might be low risk, low reward, but the market itself, you get high appreciation. Like you said, you’re getting really good cashflow, but people don’t travel to Hawaii when they’re afraid or when we’re in a recession. And so when the economy’s doing well, wealthy people are traveling to Hawaii, your units are going to be booked. When the economy’s not doing well, one of the first things that gets canceled is a trip over the ocean for six hours. I would love to see you balance out some of these high-end luxury short-term rentals that you’re buying with some more boring duplexes, triplexes, fourplexes in maybe the south or the Midwest, just a market that’s a little bit more predictable so that you’re not all in one area in case we do have an issue like the country goes to war or we enter into a bad recession or even a depression and you’re stuck with nowhere to sell these properties too and no way to be able to get the revenue.
So sometimes in life we look back and we see the things that were hurdles that stopped us from moving forward were actually blessings in disguise. You just didn’t feel it in the moment, but I mean, congratulations on doing well buying these assets.

Rob:
One more little thing, I forgot that this is a luxury flip. When I said my answer, I would say, while you could put zero to 10% down on a seller finance property, it doesn’t mean that you should. I mean that ultimately means that you’re leveraging yourself a ton at that ratio, especially on a luxury property. And the reason you don’t want to necessarily leverage yourself at full 100% capacity on something like that is that if you ever sell it, you’re going to have to come out of pocket. If you ever sell it in the next couple of years, you’ll likely have to come out of pocket at the closing table to sell it, to pay realtor fees, broker fees, all that stuff. So I would probably be seeking out something where you could put 10 to 20% down. I think that’s going to be more realistic, especially on the luxury high end stuff. You’ll still likely have to put 20% down, but it’s still going to be less than that 30%. I think 20 is always going to be that, I dunno, that golden ratio for high cashflow and then you have money in it, the stakes are high, you have to treat it as a real investment. Obviously less is better, but 20% down on a luxury, I’d feel pretty comfortable in that range.

David:
I think that’s a great point you made, Rob, is the equity in a property is actually your cushion for when something goes wrong. It’s a form of risk mitigation.

Rob:
Totally. Yeah. Yeah, no, I think a lot of people get into the no money down starry-eyed phase where they’re not really developing a healthy relationship with debt, and I think, yeah, you still have to work for your down payment and still do things the old fashioned way, even if it is something like seller financing, in my opinion. Anyway.

David:
Yeah, this was a great question. I’ve never really thought about it from this perspective, but we tend to look at down payments like there’re this burden, this obstacle, oh, I have to deal with the down payment. But really the more down payment that you put in, the more cushion you have. If something goes wrong, it’s a defensive metric. It protects you in building your wealth in the same way that I talked about cashflow protects you from foreclosure down payment, protects you from swings or something that could go wrong in the property where you have to get out from underneath it. You can if you have enough. Now, in the past we were printing so much money in the real estate market was doing so well that wasn’t as important. Defense didn’t matter as much because everything was going so well. But now that we’ve sort of fallen back into more of a sane housing market, I think that we need to include a little more defense in the algorithm of how we make our decisions of what we buy.

Rob:
Totally. Yeah, yeah, yeah. Good question.

David:
Alright, coming up, we have a community member looking for the most efficient way to get started and talking through an aha down payment moment. We’re going to be right back after taking a quick break, so don’t go anywhere. All right, welcome back. So far we have covered luxury st. A new way to look at down payments in real estate, why Hawaiian real estate is the way that it is, and now we’re going straight into the forums on bigger p.com and if you’re interested in checking out the forums, much like my haircut, it’s free. Dave Smith from the BiggerPockets Forum says, I’m looking for advice on trying to figure out the most financially efficient way to get into real estate investing. I’m an automotive mechanic currently making just shy of $30 an hour and I have about 35,000 saved up due to still living at home.
I live in Eugene, Oregon where the average home price is about four 70 K. Small duplexes in need of work appear to be obtainable for around the high three hundreds to mid four hundreds As a first property, I’m leaning towards a multifamily home, likely a duplex due to my budget. I’m trying to decide between doing the bur method while living in one half and renting out the other or building a duplex from the ground up. I’m a handy person who would be able to perform much of the home renovation myself on a new build. I’d be able to do some of the work post framing. The process of building a new home is relatively intimidating, but I have heard that in Oregon it can be cheaper to build than buy all advice is greatly appreciated. Alright, Rob, speaking of slightly or relatively intimidating, that sounds terrifying to me. What are you thinking?

Rob:
Yeah, so I kind of mapped it out for him. I think both are great options if he can afford it. Just for some numbers here, he’s got $35,000, which could be 20% of a $175,000 purchase. Now on a brrrr, if you were to go out and get hard money, oftentimes you still have to put something down, right David?

David:
Okay, that’s tricky. You’re going to put something down to buy it for sure, but after the refinance, I think what you’re saying is you’re still going to leave something in it. Is that what you’re asking me?

Rob:
No, no. I mean if you’re going to go out and get hard money on a brrrr, I mean I guess there are a lot of hard money lenders that may loan on the entire amount, but typically don’t. Hard money lenders like to have some skin in the game.

David:
Oh, I see. For the hard money loan. Yeah. Your best case scenario for most bridge lenders that I’ve seen is you’re going to put 10% down. Many of them will let you wrap the rehab into the actual acquisition. That’s what we’re doing at my lending company. Usually though, 15% is where most of ’em are going to be unless you’re really experienced.

Rob:
So if you could put 10 to 15% down, that ups it quite a bit because $35,000 is effectively a $350,000 home that he could refi. So I actually, I like that option because on the flip side of this, he’s asking if he should do a new construction from the ground up. Well, I guess my question would be knowing that $35,000 is 20% of $175,000, which is what he would basically need to do with a new construction loan, I don’t know if that’s going to build him a full on duplex with land in Oregon. I don’t know how expensive. It’s all purely based on what area of Oregon, but one 70 5K doesn’t seem like that big of a construction budget for me for what he’s trying to do. So for that reason alone, I’d say he gets a little bit more leverage and into a more feasible real estate scenario executing a brrrr. What do you think?

David:
I am terrified of someone that has never built a house before just trying to build from the ground up. When he made the comment I could do work post framing.

Rob:
Oh yeah,

David:
Right.

Rob:
Been there.

David:
There’s a lot that happens. You’ve got all of your infrastructure that has to be built. You’ve got your rough in plumbing, your electrical, your foundation that has to be built. The framing itself, I mean it’s great that you’re a handy person and you can step in when you’ve got maybe sheet rock and some finishes are going to be done. Maybe I’ll come up with an analogy of how that’s not, it’s kind of like me as an uncle, but I’m great with kids, but I don’t have to actually have the kid all the time. Your parents would understand.

Rob:
But with that said though, you do actually have the ability to apply a lot of those soft costs and money that you’ve spent on land and everything towards your down payment. I mean, it kind of depends. It’s not always like that, but if you spend $35,000 worth of expenses, sometimes they will take that into consideration. Mostly on the land though, not typically on soft costs.

David:
And in addition to that, you’re going to have architectural costs, engineering costs, and my favorite part of real estate, you get to play with the city. Local governments are the best. They have amazing service. They’re all very concerned with making sure that they make their constituents happy, they’re passionate about their job, and they’re working very hard to achieve promotions and harmonious relationships with the voting block. So that alone is the reason to get into a new construction build. I’m kidding. I’m being a little facetious here. Here’s what we’re getting at. You don’t know what you don’t know when you try to build a house, so I would much rather that you started burning, make some connections with contractors, move those connections into home builders or a contractor that’s built homes. Sit down with them and go through the whole process of what building a house is like and then when you can see all the cards, make the decision on where you want to make your bet.

Rob:
Yeah, yeah, I was going to say it’s a good answer and I was just going to ask, I mean obviously I mapped it out kind of back to the napkin here, but what could he do with $35,000 in a bur scenario?

David:
Not going to build a house.

Rob:
No, no. Yeah, definitely not a house, not a new construction brrrr. I think he’s going to need more money for that, but could he feasibly do a brrrr with that amount of money?

David:
Yeah, I would combine house hacking with brrrr and I would just extend your timeline when you’ve got a lot of capital, it just means you could get the same things done in a short period of time. You could get a lot of people involved in many hands make light work. So with $35,000, he said these houses are around four 70, you might be able to get one for a little bit less, I guess high three hundreds to mid four hundreds, you can put 3% down on one of these small multifamilies even up to five or 10%. If you had to get in on a fixer upper, fix up the unit that you’re living in or fix up one of the other units and rent it out. Fix up the unit that you’re living in as you save money, keep fixing them up slowly. Then just follow the valuation When you think that there’s enough value to justify a refinance, you go in there and you refinance into another primary residence loan and you pull some of the equity out. I mean, it may not happen in six months, like everybody wants a bird to happen in, but it’s definitely better than waiting and then you can get some of that money back out and put it into the next one and just house hack again. I guess you’re just combining house hacking and bur together

Rob:
A house bur

David:
Yeah,

Rob:
I like it. A

David:
Buring a primary residence.

Rob:
There you go. I

David:
Dunno. We’re going to have to workshop this.

Rob:
No, I like that. That’s good. A Bri Mary residence. Hey, that’s the 18th book you’re working on for BiggerPockets right now, right?

David:
That’s right. You guys all heard it here the first time that David Green ever actually came up with his own description without Brandon Turner. It took me about five years, but I got one. Alright, browse hacking with David Green and Rob Abba solo, the next BiggerPockets podcast. Here’s what I’d like to say to you Dave Smith from the forums. First off, well done for saving $35,000 and living at home. I love that you’re working in an area in Eugene where the wages aren’t super high so the going gets slow. Just consider if you could put yourself into a different auto mechanic shop that’s a little more challenging. Maybe you’re going to be working on European cars and it’s not like a Honda Civic and so they pay a little bit more because you become a more skilled mechanic. Maybe you’re going to have to be an apprentice at a new place and learn new skills, but look at where you might make more money as a mechanic or even consider moving somewhere where they pay more and bringing those skills.
I know in California we have a really big shortage for blue collar type workers and the are high people don’t realize this, but traveling nurses in Northern California make considerably more than a hundred dollars an hour and that’s before their overtime. Wow. So they can be making 150 to $200 an hour as a traveling nurse in this area because the cost of living is really high. I’m not against people moving to areas where they can make more money and then saving it and then taking that money into a different part of the country where it’s going to stretch further. So you’re doing great with your saving and your real estate investing, but don’t be afraid to mix up how you’re making the money or how you’re saving the money or what you’re doing to get it to accelerate your process of saving money.

Rob:
But I’m going to say, I mean he makes $30 an hour is basically 60,000 a year. He’s got $35,000 saved up on a $60,000 a year salary. Very commendable, my friend. That’s very impressive.

David:
Hell yeah. That’s why I’m saying if you could get up to 90 to a hundred thousand dollars a year and still spend the same money you’re spending, you could maybe double how much you’re saving and then cut in half the time it would take to get down payments for the next properties and over a 10, 15, 20 year period of time, that’ll have some very significant impact on your net worth.

Rob:
Yeah, I think for anyone listening that might’ve listened to that, they might’ve been like, oh, the answer is make more money. A lot of people get mad at that, but I think you actually laid out a very logical plan. It takes a little bit of pain in the short term though, right? If he’s making $30 an hour, he’s going to have to go apprentice somewhere that’s going to be a nicer car or mechanic shop or whatever. He might make less until he makes more. So there is a little bit of sacrifice there, but what he’s getting out of it is $30,000 more a year with the $15 an hour pay bump, just like you were saying. So there’s definitely a path there, but it’s not necessarily an easy one, but very commendable overall that he’s been able to do it thus far. Alright,

David:
Our next forum question comes from Dave Hart. I think something clicked with me when I heard you guys say that. Any deal can cashflow depending on how much money you put down versus how much you finance. Well, well didn’t see this coming. Did

Rob:
He listen to the first question already? That was fast.

David:
This is very fast reviews that we’re getting here. The idea that a property doesn’t cashflow is scary. Would it be fair to think of this as I’m making that additional down payment over time as opposed to putting the money into the property when you purchase, if I can buy a property with 20% down, it has a negative $200 a month of cashflow that’s hypothetically the same as putting 25% down that has a breakeven cashflow. I’m just investing that additional 5% of the purchase price in monthly installments. It keeps more cash in my pocket in the short term. I just have to be disciplined with reserves to cover those monthly payments and have enough on hand for maintenance and repairs. All this, assuming that the down payment percentage doesn’t negatively impact my mortgage rate, PMI, et cetera. Am I thinking about this right and are there other aspects or risks that I’m not seeing with this approach?
Dave? I’ve thought very similar thoughts. Okay, so I’m not telling you to buy a property that loses $200 a month, but I am saying yes, you’re thinking about it, right? It is true that if a property cash flows at 30% down, you could put 10% down and you’d be losing money, but you’d be keeping $20,000 that could be invested into something else. It’s absolutely true and when rates were lower, you could borrow money at a cheaper rate and so it made more sense to just borrow as much as you could and put as little down as possible as rates are going up, putting more down starts to make more and more financial sense. Rob, I’m sure you’d agree if rates were at 16%, we’d be telling people you need to put a very big healthy down payment down. Every podcast would be about don’t be stupid, put money down on a house, don’t even use a loan. That would just be like a common trope that would be going around. Now when it comes to actually doing this in practice, putting less money down to keep more money for yourself and losing $200 a month, most of us are going to be hesitant to say, yes, you should do it if you’re going to do this. This is only for the financially

Rob:
Savvy.

David:
Yeah, savvy powerful is what I was thinking. You got to be in a place where 200 bucks a month is almost something you wouldn’t notice. If you’re going out to eat five times a week at really nice restaurants and you could cut it down to four and save 200 bucks a month, this is a thing that those people can be doing. This is actually something wealthy people do. They buy houses in the Hamptons and in Malibu and they wait and the equity climbs really fast because they can afford to put the money into the house. But the majority of listeners on our podcast are not having caviar with Kevin Spacey in Malibu. They’re trying to climb their way out of working at Jiffy Lu by investing in real estate and that’s why we usually don’t recommend people do this.

Rob:
Okay. One little thing here that I’m going to toss in because everything that you said makes sense and I think you’re a little bit more on the right track. I think the way that he might be off a little bit is he equates losing $200 as, Hey, instead of spending the 5% down, I’m just reinvesting it back into the property and I’m paying 5% over time, but really that’s going to amount to probably 10 or 15% over time simply because the extra $200 a negative cashflow that he’s paying isn’t going directly to principal. As a matter of fact, it’s mostly going to interest and so for that reason, it’s not like one-to-one not like, oh, I’ll just put the 5% in by losing 200 bucks. He’s just basically paying to interest at that point, so it’s close. It’s just not exactly that. I wanted to point that out.

David:
Thank you for catching that. That’s why I bring you here to seeing green Rob because sometimes I’m seeing green, but you are seeing black and it all comes together and it makes

Rob:
Sense. I’m seeing sense.

David:
Yeah, you’re seeing sense. That’s it. I didn’t get that. What he was saying that the money that he’s losing, he was saying I’m paying the principal down by that much. If there was no interest on the loan, that would be correct, but because there’s so much interest in an amortized loan, then that’s where you’re wrong. Dave, you’re welcome. Thanks for showing up. Rob has your back. You gave us good content and if you have a question like this one, then you’ve been listening to the podcast and thinking, Ooh, I wonder if it works like this. Head to biggerpockets.com/david, leave your question, let us answer it. We would love you. Alright, let’s check out some comments that came in over on. The first one comes from Crystal Bar future landlords watching not raising rent consistently and fairly is a huge mistake. Don’t fall in that trap. You’re not doing anyone a long-term favor if you do that.

Rob:
Oh, I don’t know. I don’t think it’s that black or white. Yeah, I’m going to say this as a short-term rental focused person, I don’t have to deal with this because the rate that I charge is the rate that people agree to. I’ll be the first person to say long-term landlord, I’m the worst person for this job. I’ve done it and I’m very sympathetic and I work with my tenants. I don’t know, I guess I’m making it seem like that’s a bad thing, but I would say if you had a really good tenant that you’ve built a good rapport with and you have had an awesome experience with and you cashflow very nicely, I think it’s okay to not gouge them on price, on rent increases. If you’ve got the consistency of an amazing tenant, I don’t know, am I too soft? As the millennials people say it,

David:
Yeah, you’re a hundred percent wrong. Let me give you guys a good strategy if you like what Rob said, but you also understand that you want to raise rents, raise the rents to as much as you can possibly get, and then choose to credit back to your tenants every month the amount that you want to help ’em with. So the lease needs to say what current rents are and then it is in your control if you want to kick somebody back $300 a month. But if you don’t do that, if the lease says a number that’s 300 bucks less than market rent when you go to sell your house to somebody else, it’s not going to be worth as much. When you want to raise the rents to another amount, you’re not able to. If the relationship you have with your tenant changes, there’s limits on how much you can jump it up. So it is very smart to keep them at market rate as close as you can get to that and then just choose to give somebody a credit as opposed to limiting how much you can collect in the first place.

Rob:
That’s fair. I just don’t think anybody’s going to do that. I mean it sounds good. I think what you’re saying makes sense, but I’m like who’s going to actually at the end of the month credit them? And I’m not even saying don’t raise rent because I think the lease kind of lays it out. You sign a 12 month lease and you say, Hey, if you choose to renew, rent will go up three to 5%. I think that’s kind of black and white. I think what I’m saying is if you get to this point where you’ve had an awesome tenant and they’re like, Hey, I genuinely, if you’re going to lose the tenant over that three to 5% and you really like the tenant, I think that’s where I’m coming in with. I think I would rather just have the security of someone that pays on time. I’ve also had tenants that didn’t and lemme tell you, charging more and making more money for a tenant that pays me. I hate that over someone that is super secure and pays me secure every single month on time. I will take that nine times out of 10. Alright,

David:
We’re going to be going to a break, but right when we get back, we have two questions coming up. How to approach a fellow landlord to acquire more deals and if you should buy one or two homes based on what you qualify for, all that and more right after this break. All right, welcome back. Thanks for taking the time to support the sponsors that help bring you this content by listening to our ads. And remember, if you’re listening to this episode and you love to see green, make sure that you subscribe to get notified when these episodes come out that tells us a BiggerPockets that this is the kind of content that you want. All right, our next question comes from Brandon Goli.

Brandon:
Hi David. My name is Brandon and I live in a suburb outside of Richmond, Virginia. I have a few questions about negotiating seller finance deals in the current market for long-term rentals. My wife and I are new to real estate investing and are looking to get started with our first investment property. We currently own our primary residence and have a little over 200,000 in equity. However, we’re looking to turn this property into a long-term rental when we move, since it should cashflow in our market, which is pretty difficult to do with home prices and rents where they are currently. We recently found out that there is another house in our neighborhood that is owned by an out-of-state investor, and after doing some research, we found out he owned several in the area and has owned them for 30 plus years, and so we’d like to approach him to see if he would be interested in offloading any of his portfolio. Just wanted to ask your advice on how to approach that conversation and if you have any recommendations on negotiating seller financing deals as well as any additional due diligence that we should be aware of or thinking of for these types of transactions versus a conventional transaction. Really appreciate the advice and really enjoy the podcast. So thanks a lot.

David:
He asked a great question, how do you approach a fellow landlord about buying one of their properties? Rob, let’s say that I’m approaching you and I want to buy one of your amazing properties because you are the short-term rental expert in all of the land. And to accompany my fine source of meats and cheeses that I’m surrounded with, I’d like a couple of trophy properties. How would you like me to bring it up with you?

Rob:
So typically, I mean the typical progression here, do you want to get on the phone with the landlord? I mean obviously you want to meet them, but it’s going to take a little bit of time here and you want to build a little rapport. You don’t want to go straight into will you seller finance this because you’re asking for a very personal thing and you’re basically the seller’s acting as the bank and you’re basically asking them to trust you. Some random person. So this is a people business and building a relationship with that person is important. Talk to them. Don’t lead straight into will you sell or finance a house. Now, typically what we’ll do is we’ll talk to ’em about the house, what they’re looking to do, and then we’ll ask them if they’re willing to sell on terms. This is something that my good friend Pace Morby has shown me, and usually that brings to light a question like, well, what do you mean by that?
What are terms? And you’re like, well, hey, basically you would act as the bank and you would be the person that takes payment from me. And then you start to want to list the actual benefits for the seller in this case, because the seller has the option of people going out to a bank the normal way and buying their house cash and they can get one lump payment right then and there from a typical buyer. Now in 2024, interest rates are really, really, really high and that buyer pool might be a lot smaller. So things that you can tell the seller to make it sound beneficial to them because it can be is, Hey, we can close fast. We can negotiate the exact terms that you want. We can amortize it over 15, 20, 25, 30, 35, 40 years. You can set the interest rate with the seller. But the big key here for a lot of people is they don’t like to pay taxes or capital gains on their property.
And so when you go the seller finance route, you can approach the seller and say, Hey, if you finance the property to me, you’ll not be taxed the lump sum on the purchase price. You’ll be taxed on the income that I pay you every single year. And so that’s where you can start listing off some of the benefits for the seller themself. That’s how I was able to do it. I was actually in his exact situation where I bought a property in my neighborhood, 100% seller financed. I only had to put down 10%. And when I asked the seller, Hey, why are you doing this? He was like, well, I can’t sell it. It’s not going to cashflow for a typical investor and I don’t want to pay taxes on it. Truthfully, I’ll probably be dead when this loan is over, but I don’t care because I don’t want to pay the taxes. I would really try to build rapport and really help them understand the benefits of seller finance versus making it seem like it’s such a beneficial deal for you. I think that’s where you can kind of get into a weird situation where it feels like, oh, well, you’re getting all the upside. Why would I do this for you? Does that make sense? It

David:
Does. And I would add to this, I don’t love the, I’d like to buy your houses with seller financing. I love, I like to buy your houses. Let’s come to terms and then add how do you feel about seller financing Once you see that there’s motivation there to sell and maybe you sweeten the deal for them in some way if they agree to add the seller financing component. So if you open with, Hey, I’d like to buy your houses with seller financing, that’s kind of a bit of a turnoff. They don’t know you yet. They are taking a risk. You’re not all the upsides for you. If you say you’d like to buy the houses, you come to terms on a price and some conditions and they say, you know what? I can throw in a little bit extra. If you can do seller financing, here’s how it would work. Now there’s already a little bit of rapport. You’re more likely to present that to them in a way where they see that there is some upside, maybe the purchase price is a little bit higher or something else.

Rob:
So one other thing that I think also on that note is he said that this was in his neighborhood, that this was someone in his area that he wants to buy from. So I think let them know that you’re a neighbor. When I close my seller finance property, I said, Hey, I’m Rob. I live over on blah blah, blah and blah, blah, blah. I’m actually a neighbor to this house. I would love to buy it one, two, he’s actually in a very good spot because this person is an investor, meaning the investor knows how investing works and how real estate works, meaning that real estate should cashflow. And so what you can do is you can go to that seller and say, Hey, listen, I can’t buy this conventionally because the interest rate is 8% right now and at 8% I’m actually going to lose $700 a month.
And if you can put it in those terms where they understand, well, dang, if all of the investors are going to be out simply because they’re going to lose money, I’m never going to sell this house. So what you can say is, or like you said, let’s come to terms if you’re willing to sell our finance, this to me at 3%, that’s the interest rate that I got. I’m actually going to be able to now cashflow a thousand dollars a month now this is a great deal for me. I’ll pay whatever down payment you want or I’ll amortize it or whatever. I just want it to cashflow. Now in that instance, when I told that to the seller, he was like, well, cashflow, sometimes you lose money in real estate. That’s how it works. I was like, I don’t don’t want to lose money. I want cashflow.
And he is like, all right, I’ll do 3%. So I think that’s kind of approach it as an investor and show them your underwriting so that you’re not just kicking tires. If they feel like you’re kicking tires and trying to get one on them, you’re not going to close the deal. Yeah, we actually had an episode with Cody Davis who is a master at seller financing. It was episode 5 54 on getting 81 units with no bank debt, and he had an amazing approach. So go listen to that episode if you want more nuggets on how to do seller financing.

David:
All right, our next question comes from Sarah Knight. Hello David and Rob. My husband and I qualify for a home loan of roughly $800,000, but are considering instead purchasing two homes without buying power. Would it be possible to instead get approved for or take out two mortgages for roughly $400,000 each? We would likely use one as a primary residence and could utilize his VA loan and another as a short-term rental vacation home and would put 20% down. Thanks in advance. Love your show. All right, Sarah, so you’re trying to figure out the debt to income ratios. I would say it’s probably close. You could probably get close to two, 400,000 house. It might be a little bit less, but I don’t know if it’s going to be a huge difference. So if you don’t need an $800,000 home, let me put it another way. You should never buy as much house as you can just because it’s the most that you could buy. You should always get the best deal you could get. If there’s a great deal at 800,000 that’s worth a million, hell yeah, go for it. But don’t spend $800,000 just because you are able to spend $800,000.

Rob:
Yeah, it’ll be a little less than $400,000 each just because you’re going to add on the expense of insurance to each one of them. And your debt to income ratio is what comes to play. Typically, I believe the rule of thumb for most lenders is they want your debt to income ratio to be 45% or less. Check me there, David. Is that about right?

David:
No, it could be less than that sometimes. It depends if it’s like a primary residence or if it’s an investment property, I would say like 40 to 45%.

Rob:
Okay. Yeah, 40 to 45%. So that’s pretty much what it’s going to come down to. If you take on two mortgages, do those put you over that threshold? So you’ll want to work with your lender to just make sure that whatever properties you buy keeps you under that 40 to 45% and that you can still qualify. What I would hate is for them to buy the short-term rental investment property first, like they’re planning here, and then not actually be able to buy the primary residence that they wanted or dreamed of because they kind of use their DTI too much for the investment property. So just think through that beforehand.

David:
Yep. And another thing to think about when you buy a property, whether it’s 400,000 or $800,000 you’re taking on the debt, but when you then make it a rental, you’re able to claim usually 75% of whatever your lease states that you’re getting for rent. So even though you’ve taken out that debt, you get more income because you can include the rent that you’re receiving from the tenants as your income. So you may not qualify for a full $800,000 again next year, but you will still qualify for the majority of it because you’re getting income from the tenant.

Rob:
Beautiful. Love.

David:
All right. We’ve covered quite a few topics today, which is awesome, including a smaller down payment, but negative cashflow, should you or shouldn’t you do it? Something that many families have argued about over the Thanksgiving dinner table, and we’ve now equipped you to win that argument. If you should build or brrrr a duplex as a handyman and how to earn more money and save more money while you’re at it. How to approach outstate investors that own rentals in your area, the right way to bring up seller financing and the wrong way to bring it up

Rob:
And how much house you should buy. Just because you can qualify for a certain amount doesn’t mean that you should buy that

David:
Much. If you like this show, do us a favor, subscribe to the channel, hit the notification bell so that you get told whenever there’s a new podcast coming out. And help us keep making it. Head over to bigger p.com/david and submit your question to be featured on Seeing Green because we wouldn’t have a show without you. And last but not least, let us know in the comments what your favorite part of today’s show was and at a timestamp, if you don’t mind. So other people know what they should check out if they’ve got a short period of time. And we will keep an eye out for that and maybe get you featured in the YouTube section on a future Seeing Green. I’m David Green, he’s Rob Abuso. You can find our information in the show notes, so give us a follow and send us comments about what you think about the show. We love having you and we’ll see you on the next episode. This is David Green for Rob, the luxury short-term rental specialist. Abolo signing up.

 

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