You've Got a 100% Financing Deal. Do You Take It? (Rookie Reply)

0:00Ashley Kehr:Today's Rookie Reply is for the listener who has passed the dreaming stage but still wants to make sure they are moving in the right order. They have a goal, they are talking to lenders, and they are studying deals. But the next step still feels intimidating. Today's questions come from the BiggerPockets forums, and we have someone reverse engineering a first house hack, a rookie weighing 100 % financing, and a young investor who wants a real step-by-step path before that.

0:29Ashley Kehr:This is the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. With that, let's get into our first question, which comes from Trey in the BiggerPockets forums. And Trey says, my goal is to purchase my first rental property by house hacking a two to four unit property using an FHA loan. I've identified when I want to buy. And I'm now focused on reverse engineering the steps needed to execute confidently and efficiently. So what he's done so far, save for a down payment and closing costs, actively building his cash reserves, has funds parked in a high yield savings account, got really clear buy box criteria, focused on educating himself, read a bunch of different books and podcasts and all those different things, became a BiggerPockets Pro member.

1:16Kudos, Trey. Congrats to you. And planning to join the next local real estate RIA meetup. So next steps are get pre-qualified with the local lender, use that to understand ballpark on buying power, complete the pre-approval process, and then build out his team. So what he'd love advice from the community on is pre-qualification versus a pre-approval. For an FHA house hack, is getting pre-qualified early enough for meaningful planning or should certain steps wait until I'm within 90 days and pre-approved? Agent timing. From an agent's perspective, would connecting after the pre-qualification but before the full pre-approval be appropriate or would doing so earlier be too soon and potentially a misuse of the agent's time given my timeline?

2:09Number three, building the vendor bench. As a first-time investor, what's the best way to proactively build a reliable vendor bench? your plumber, handyman, electrician before owning a property? How early is too early to start those conversations and what's the right way to approach those folks? And then number four, just blind spots. Looking back on your first FHA house hack or small multifamily purchase, what do you wish you'd done earlier in that process? All right. So lots of context and lots of good questions here. I think first, just like one clarifying piece because the kind of first part of this question was pre-qualification versus pre-approval.

2:45And they're really the same thing, right? So you go to a lender, you get pre-approved, right? Ash, I'm not making that up right now. I've never heard of a difference between a pre-qual and a pre-approval. I think it's more of just like a pre-approval.

3:00Ashley Kehr:I think they do a little bit more like maybe a soft credit pull or something where a pre-qual is just like very basic to like basically get you a letter to the, um, to submit with your offer. Like, I think there, I think there are lenders that use a difference as in like, this is just like, we're looking at your stuff. Like, yeah, it looks good. And then there's actually where they verify what you told them as the next step. Cause like, actually there was a lot of like, um, controversy with that, where like you literally would fill out an online form for this one investor and like one of his companies you could like print off a pre-approval letter to like show for proof of funds or something like that but i i think it's something like that but i don't know for sure but i think there is like a difference let me reframe that then um all right well i think the first piece is the the whole idea of pre-qualification versus pre-approval um ash and i but we've both done a lot of deals we're also not lenders.

4:08So maybe we can get a lender to come on here and clarify this for us. But I'll tell you my experience. My experience has always been that the pre-approval or pre-qualification have always kind of used interchangeably. There might be some differences technically behind the scenes on those. But for me, the pre-approval is me going to a lender, them taking a quick look at my background and saying, hey, we feel pretty good about what we see here. And here's like a ballpark pre-approval that we can work with. Now, once you actually have a property and you're under contract, that's when you go into full underwriting.

4:41And it's during the full underwriting process that they come back with all these different questions and conditions and, hey, you got to do this to be able to qualify and do this and do this and do this, right? So when I bought my very, very first piece of real estate, which is my primary residence, I got a pre-approval. I went out there shopping for the deal. Now, when I got into full underwriting, they're like, hey, Tony, you got to sell your BMW. You know, I got like my first big boy job and I bought like this three series BMW and like, Hey, we can approve you, but under the condition that you sell your BMW because it impacts your DTI too much.

5:09Right. So that's always been my experience is you do the pre-approval to give you a ballpark on what you're pre-approved for from a price point. But then for the specific property, they run you through full underwriting to say like, Hey, here are all the nicks and crannies and things that we need to go dig into. And then they get you the ability to actually close on the deal. So I would say start the pre-approval process now so you actually have an idea of what your purchasing power is, and that will help you further refine your buy box to make sure that it actually aligns with what you're pre-approved for.

5:39Ashley Kehr:Now, agent timing, I would connect with an agent as soon as possible. You can get set up so that they are sending you automated emails that fit your buy box of properties. So you can go ahead and start getting alerts, seeing what information you'll actually get from the agent on the property. A lot of times there is more information when the agent sends you the direct listing than you would see on Zillow. So like there's a lot of times you'll be able to see like any attachments. I was looking at a Zillow listing earlier and it said like in the listing description, see the attached letter from the seller for more information.

6:20Ashley Kehr:And on Zillow, you can't see that. But if you get on the agent's list and you actually get sent directly from the MLS, you can a lot of times see that different information. Like sometimes even the rents that they're paying and they don't put it on the Zillow listing. I don't know why, but I would get with an agent as soon as possible to start understanding deals and maybe even connect with a couple of different agents and see the different things that they're sending you, who, you know, is sending you more information, who is more helpful. I just love the story of Tony match, matching with an agent on agent finder on biggerpockets.com in Oklahoma city and her just sending him this overwhelming amount of information about the area that he wanted to invest in, which was like, Tony, right?

7:09Like you hit a pot of gold,

7:11Ashley Kehr:like more information than you even needed. But like, this was just the agent going above and beyond to give him this information before he even looked at his first property with her. Right. Yeah. Yeah, absolutely. And, and I had contacted several different agents to the agent finder and, you know, some send small emails, but she sent this just like this massive repository of everything I need to know about investing in OKC. And that, that was part of what gave me the confidence to go into that market. So yeah, the sooner you can have that conversation with the agent, the better. Part of an agent's job, I don't think you need to feel like you're wasting anyone's time.

7:44Part of their job is talking to potential clients. So I think they'll be happy to have that conversation. Which actually kind of leads into the next question that you had here, which was the vendor bench and how do you build your roster of electricians and plumbers and handymen and so on. And I think going back to the agent piece, if you can find a really good agent in that market, oftentimes they have that bench for you and they can kind of connect you with those folks. Now, I think if you know that you're going to buy a property that's going to need some work, then yeah, maybe find like a general contractor or a handy manager.

8:19First step is probably going to be the place that I'd go. But I might not invest too much time going super deep into the sub, like into the sub trades, like someone to drywall repair and someone that they can do woodworking, carpentry, those things, making cabinets, all those things. I've maybe just focused top level GC handyman, someone that can knock out some of those things you'll need to get the property ready. And then just naturally, as you're owning and managing, you can start building out that roster of folks to do some of those other things that maybe weren't present on day one. But if the plumbing checks out pretty clean for the property and nothing comes back as a concern, maybe I don't spend a ton of time on day one going to stretch for a plumber.

9:00Ashley Kehr:Now, the last question is around blind spots, like anything that they're missing with the first FHA house hack or a small multifamily purchase. And one thing I will say is like people talk about the FHA inspection is like, you know, some things might come up or whatever. And you have to be prepared how you're going to handle if anything comes up in the inspection. Are you going to ask the homeowner to make those repairs? is if the homeowner says, no, I'm not making those repairs, are you willing to go and make those repairs on the property without even owning the property yet just for it to pass inspection?

9:38Ashley Kehr:So with the inspection, things that will come up like peeling paint, a handrail, like some of the stuff won't be a big deal, but to the seller, it could be an inconvenience to them. So as you're getting ready to approach the inspection for the FHA, when you get the list of information back, see if there, you know, what, is there anything that you are willing to either pay for or tackle, or you definitely want the sellers, but just go into that kind of having a game plan of what you are comfortable with. So that if things do come up during the inspection, you can go ahead and start moving forward to get through that as fast as possible because then you'll, you know, it will delay closing until those issues are resolved.

10:25Ashley Kehr:And when you are viewing the property, just go online, ask Claude Chachypt for a list of things that would make a property fail inspection from an FHA loan. And when you're walking the property, see if there is anything that you notice. Is there no handrail going down into the basement? Okay. Not a big deal. You can pick up a handrail at Lowe's, you screw it into the wall. Okay. Peeling paint. I have a property right now where we completely renovated the whole inside. The exterior of the property is painted and there are a couple different spots where the chip is painting. $7 ,000 is the quote that I got.

11:07Ashley Kehr:Anybody else can't do it until spring, which is, you know, a long time from now. So that is actually a really big deal that we didn't see coming up because we didn't think it would be that expensive to paint this house, but the way it sits on the property with the neighbors and how they have to get to it and all this stuff or whatever. So some issues that seem like they're little actually could be very big and expensive issues. So you have to be prepared for them. Okay. Coming up, a rookie has access to 100 % financing, but someone close to him is warning him not to use it. We'll talk about when leverage is helpful and when it becomes dangerous.

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14:47Ashley Kehr:Okay, our next question is from Jason Watts, who has found a lender willing to finance the whole purchase and rehab, but he is hearing some strong warnings from someone in his circle. I'm on my journey to buying my first investment property and I've spoken with a couple of lenders and one gave me the name and number for a private money lender that would fund 100 % of the right deal purchase and a rehab on a six to 12 month term at probably 10 to 11 % interest only. Our family has a close family friend who is an aggressive agent that I pretty much have to use. I spoke with her today and she warmed me up one side and down the other not to try to get into real estate investing right now, especially with a 100 % loan at 10 to 11%.

15:31Ashley Kehr:Her concern being that I would use all of the loan for the purchase and have nothing left over for the rehab and that anything I find that's been on the market for more than 90 days can't be a good option because in the market, because there's not going to be anything that a more experienced investor hasn't looked at and decided was a bad investment. All that to say, after my call with her, I'm feeling a little discouraged, but I still want to have my first property before the end of the year. The first thing you need to do is ask this agent how many people she works with that buy their primary residence, how many people she works with that are actually investors.

16:09Ashley Kehr:And I'm going to bet that the pendulum swings the majority of people that are her clients are buying for their primary residence and are actually not buying an investment properties. Because there are deals out there and a good agent that works with investors is going to help you find these good deals, not tell you not to buy anything right now. Let's just start with that. The second thing here is the financing piece, the 100 % financing. So are you comfortable with estimating the rehab that you're making sure you're getting enough money on this loan to cover the rehab? Do you have enough reserves in place so when the property is finished and you go to refinance or you go to sell it and it doesn't appraise or it doesn't sell for the full loan amount, like maybe, you know, there's $20 ,000 that you need to bring to the closing table because it didn't sell for however much you borrowed from this person?

17:10Ashley Kehr:Are you able to cover that? And what is a gap that you are comfortable with that you think there's no way it could sell for less than this? because the agent is right that the market, you know, the market is not great right now, but the market also could go down. So it could get even worse where you're stuck with this 100 % financing. You have no equity in the deal for wiggle room and you have to sell it at that price to pay back that lender. So I used 100 % financing for my first couple of deals. I took a partner on, but I gave him equity in the deal. So if for some reason we missed a mortgage payment to him, it wouldn't be as bad of a thing because he was also an owner missing paying half of that mortgage payment to himself.

18:03Ashley Kehr:So I think you have to look at, are you able to buy this property under market? And that was something that I was doing was like one property I bought for 37 ,000 right after closing, I put an$800 fridge in it and five days after closing it appraised for like$52 ,000. Okay. So I was buying undervalued property. Those are way harder to find now. So I do agree, be cautious with the 100 % financing, but I strongly disagree that there aren't deals out there and you shouldn't be investing right now. Two things I'd say. Yes. Great point on the, on the agent, Ash, go find a new agent. I get that she's a family friend and you said that she's quote aggressive, but if she's not an investor focused agent, that she's the wrong agent for you.

18:49So go to biggerpockets.com slash agent finder, find the right agent. Number two, let's just assume that what she's, the, the, what this agent is telling you is true. Let's just assume that your market right now really is a terrible place to go buy. That's fine. Just go pick a different market. There's 20 ,000 cities in the United States. And even if your market might be an absolutely horrible, terrible place to buy right I don't think it is. There's always someone making money in some market. But even if that is true for your specific city, there are other cities out there and you just need to go find a different city.

19:22So I wouldn't get too caught up in one agent's sentiment about one specific market when there are many, many more agents in many, many more markets to go tackle. So if your goal is to become an investor, find the right agent in the right market and go get the deal done. All right, after the break, we've got a 20-year-old investor with a young family who wants some rentals, but he's worried about making the wrong move. So we'll talk about how to turn fear into a concrete action plan right after the break. I just booked a trip to the coast and I cannot stop thinking about it. Waking up early, walking somewhere I've never been, finding a little cafe with no plan except to see what the day brings.

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23:16Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs. Propel fitness water with Gatorade electrolytes, zero sugar, and vitamins. Propel hydrates better than water to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade electrolytes. Alright guys, our last question today comes from Acasio and Acasio is 20 years old. It's a really great question. So we'll get into it. Acasio says, I'm 20 years old with a wife and two kids, and I want to make my wife a stay-at-home mom. I've been studying rentals for a while, specifically multifamily homes.

23:55And I feel like I found good multifamily homes to buy, but I don't fully understand the loans and the paperwork behind everything and everything else that I'll need. I wish I had a true step-by-step guide in detail of what to do and how to do it and what I need from agents to paperwork to the money to understand loans. I'm trying so hard, but I'm scared that I'm going to get a rental and I'm going to mess it up and I'm going to mess it up for my family and wind up struggling. I wish I had someone who I could talk to to teach me face-to-face. First, Ocasio, kudos to you for even being on the BiggerPockets forums at 20 years old and asking these questions because there are a lot of 20 year olds who are being far less productive with their time.

24:35There's a lot of 30 and 40 year olds who've been far less productive with their time. So kudos to you for that. I think as someone who was a parent young, I was a teenage dad. I also wanted to get into real estate early as well. But what I found, Ocasio, as the best path forward for me, it was to really focus aggressively on growing my income at my day job. And once I got to a level of comfort there, and we had an abundance of income, then diverting the excess toward real estate investing. And when I finally pulled the trigger on my first real estate deal, the stakes were so low that even if it didn't work out, my family would still be fine.