220k House for 80k... what should I do?

21 Replies

I have an extremely rare opportunity to jump start my real estate investing goals. I'm getting a STEAL of a deal. My parents are moving out of the country and are selling me their 220k (market value) house for 80k. My question is, what would you suggest I do? Leave 20% equity in, and pull out around 175k to pay the 80k to them and have 96k left over to reinvest? Or pull out a loan for less and retain more equity in the house? Also, this will be a RENT house. My wife and I will not be living in it. What kind of loan should I go for? FHA? It's in Houston. -Cory Bittick

@Cory Bittick Can you move into it for two years and then sell it tax free?

What would it rent for if that’s not an option?

Check on the tax ramifications is job 1.

Job number 2 is don't blow it. 

I don't like your eagerness in wanting to do something. 

@Zach Quick I can’t move into it because it is North Houston and I live in and work way south of Houston. The rent will go for about $1,800. It’s in a good neighborhood.

@Abdul Shishi I will look into any tax ramifications. Thank you for the reply. I definitely won’t blow it! What do you mean by you “don’t like my eagerness in wanting to do something”?

Your eagerness is great! You see an opportunity and are seeking the right way to do it.

Would your parents consider financing the deal and holding the note? Could be a win-win.

Are you purchasing it from your parents with financing? If so, an FHA won’t work for your loan because FHA has to be owner-occupied. Do you have money for the down payment? If not- having your parents finance and hold the note sounds like a great idea.

It feels like you’re missing a step based on your description. You have to own the home before you refinance it. If you’re purchasing with financing, you’d have to find out from your lender if they’ll finance you initially at the $220k valuation - typically your initial loan amount is based on the purchase price not the market value. I doubt you’ll be able to take cash out initially without refinancing.

With 80% LTV are you cash flowing with $1800 rent? You want to make sure those numbers make sense, too!

Good luck! Sounds like a great opportunity.

@Stu Wann Thanks for the reply. Yes I will be purchasing it with financing. Ahhh gotcha on the FHA ordeal. I'm still new to the whole process and learning. I will look more into that. Yes I have money for the down payment. But, the mortgage lady I spoke with, said because of the equity I would have, if not pulling out the loan for the full amount, I would not need to put a down payment. But either way, I do have money for a down payment.

No, I would not be refinancing it... just financing it. My parents are selling it to me only for what they owe on their mortgage (80k). Then I'm trying to decide how much more I should take out on my loan, to reinvest into purchasing an additional property. I think I may see what you're saying though... maybe I'm confused with how the process works.

I'm not sure what my cashflow will be yet. I'm sitting down with a couple experienced real estate friends next week who are going to help me figure that out. I'm just trying to learn as much as I can now since this has to happen next month. You guys have been a great help. I love the BiggerPockets community

Originally posted by @Cory Bittick :

@Stu Wann Thanks for the reply. Yes I will be purchasing it with financing. Ahhh gotcha on the FHA ordeal. I'm still new to the whole process and learning. I will look more into that. Yes I have money for the down payment. But, the mortgage lady I spoke with, said because of the equity I would have, if not pulling out the loan for the full amount, I would not need to put a down payment. But either way, I do have money for a down payment.

No, I would not be refinancing it... just financing it. My parents are selling it to me only for what they owe on their mortgage (80k). Then I'm trying to decide how much more I should take out on my loan, to reinvest into purchasing an additional property. I think I may see what you're saying though... maybe I'm confused with how the process works.

I'm not sure what my cashflow will be yet. I'm sitting down with a couple experienced real estate friends next week who are going to help me figure that out. I'm just trying to learn as much as I can now since this has to happen next month. You guys have been a great help. I love the BiggerPockets community

You are correct. Your parents can gift you the equity as a down payment and you only need to pay closing/escrow. As for you initial question. The most logical move in my mind is to leave the equity in. Assuming you are correct about the rent - it is a cash flow animal. I would simply knock out the $80k and have a great passive asset. You can always pull a loan later when you find your next move.

I am not sure what you have looked into as of yet, however, a whole new world opened up to me when I went and talked to a local small bank in Colorado Springs where I live. They only have three branches. They only do commercial loans. If the house is only to be used as a business asset then a small local bank has WAY more flexibility in what they can offer as far as loans are concerned. I am not sure if it was just luck or maybe there are other people at small banks around the country who invest in Real Estate as well, but the banker I spoke with was a buy and hold investor. He gave 4 different methods and options on buying one home. Chances are that even if the bankers don't invest that they probably work with a bunch of mom and pop investors and they can guide you in the right direction. Even if it doesn't fit your needs right now you may end up with one hell of an education from meeting with a small town banker.

Keep us posted. Good luck and stay eager!

@Cory Bittick

What are your RE goals? Do you want to acquire more properties? If so, pull the equity out and use t on another property for sure! If this is as good as you say it is, that is an amazing opportunity to get some cash to use on another deal, while having your first property cash flowing. IMO when equity sits in a property, you're losing money because that could be another property, or two, or three....

That being said, if owning more properties isn't what you want, leave the equity and enjoy that tremendous cash flow!

The answer to your question about how much to get a loan for depends on your goals as an investor.

With a value of $240 K and rent at only $1800 the numbers simply will not work. Additionally having $160K in dead equity you are going to be paying $2 for every $1 of cash flow which will defeat the purpose of owning a income property. 

If you can not cash flow with a hypothetical 100% financing you will not achieve positive cash flow generated by the property. You will only be able to buy cash flow not earn it. 

Difficult situation, plenty of equity but no cash flow. Normally this would be a income property that should be sold however under the circumstances your parents may not appreciate that action. I would refinance/pull all equity and live with possible negative cash flow, invest in additional properties to compensate and sell your parents home in a couple of years.

@Cory Bittick make sure your parents are aware it is their legal responsibility to pay the gift taxes if there are any. Here is the formula:

Retail value - parents original purchase price - amount you pay - minus maximum gift amount = taxable amount

Maximum gift amount is the IRS maximum amount they can gift you without taxes. If they own the house jointly, they can each gift you the maximum amount. That is $30,000 in 2018. So the numbers look like this:

$220,000 - parents original purchase price - $80,000 - $30,000 = taxable amount 

Hopefully they paid more than $110,000 for the property and you are in the clear.

This is important because if you are keeping it as a rental, you want to claim the higher basis cost. Basis cost is structure cost, so is generally calculated as purchase price - land cost. That becomes basis for depreciation. If you use the $80,000 - land as basis, you will have much less depreciation and therefore pay way more taxes on rental income. You will want to use $220,000 - land as basis, which means the IRS becomes aware of the true value. 

To answer your question, yes I would finance 80% and pull all the extra equity out for another down payment. The interest is deductible from your income on the property so will further reduce your tax burden. The $96K will be plenty to get your second property.

I would talk to a CPA and work through the tax ramifications. Talking to your friends is fine, but a CPA is the one who signs their name next to yours on the tax form, so get them on board with what you are doing. 

Congratulations. If you manage this gift properly, it will be truly life changing.

@Cory Bittick It depends. If you want title to the house, you can do either. Getting a new loan will mean a higher interest rate if you're not living in it. If you decide to refinance and give them the money, you'll have to get an attorney or escrow company involved to transfer title. Despite what you do, get everything in writing. Good luck!! 

Just thinking outside the box here. 

I know you said you want to hold the property but what if that's not the best option? Seems like the property is not a rental type based on the numbers you provided (it is but not a good one others mentioned this too... it might bleed if you take equity out). Another option is to sell the house for them for 220k that leaves 140k minus lets say 10% for transaction fees (agent, title, etc) that leaves you with 118k before tax. Now you can put that money down for 3-5 rental properties that will actually cash flow!! Yeah you might have to spend a lot of time finding the cash flowing deal but hey that's what REI is! You cab also BRRRR (look it up if you haven't heard of it). If you do BRRRR right you can turn your parents house to a massive rental portfolio but not overnight!

Again, that's just my thoughs. Everything depends on what your goals are!

-Shawn

The angle I was thinking is that you purchase it from them for $80k with a loan at that value. Then you’ve got all the equity in the home. Down the road you can either refinance to the market value or get a HELOC to use for future purchases. At $80k your cash flow on the property is spectacular. At $220k it’s almost nonexistent. May be worth simply purchasing at $80k and not considering the equity until you come up with a better idea in the future for your investing goals.

one thought is to buy it sub too  if your parents dont need the loan off their credit report.. and they trust you to make the payments.   gift tax aside.  this can be done with a minimal of expense.. 

now you have ownership then you can decide if you want to refi or what have you down the track.

get the home in your name  rent it then worry about financing when your ready.

It sounds like buying it at the 80K price is not a problem for you, it's trying to figure out how to use this property in order to obtain another is the problem. Is that correct? 

Why not just keep it simple? Buy it for 80K, rent it out for a year or two, get your feet wet as a landlord and managing the property. After that initial 1st or 2nd year revisit your plan, sell it, pay it off, or refi. 

At least this way you will learn if being a landlord is for you by managing one property instead of two or three all at once.

Sell it without paying taxes then take your 140 gain and get you some multifamily deals that would cash flow better than the house would. good luck and congrats.  

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