Advice on First Purchase please

5 Replies

Hi BP Community,

I would like to get some advice/opinions on my first purchase. Little background first, two years ago I made the decision that I wanted to get into REI obtaining buy and hold properties. With little funds to start with, I applied for a CHFA Loan and was approved so I began my search for a multi-family house where I could "house hack" for a few years to build up equity on the house which I would than tap into to buy another property, refi to pay back the equity, and repeat. The problem is my area has been very dry for multi-families for the past couple of years for properties in my price range or that fits my criteria.

Fast forward to today and situation hasn't changed much.  However,  I've been dealt a possible opportunity that I wanted to get the advice on.  So my parents are in a situation where they are thinking about selling their house to downsize and use some of the profit from the sale to pay off some credit card debt.  

From reading through the forums on here, specifically the 'Creating Financing', forum, I came up with an idea on how I could get my foot in the door of REI but not sure if it's a smart move or the right move to make being my first purchase. Their house is currently valued at around $300,000 and they owe $140,000 on it. My suggestion is to purchase the house for $200,000 which would give them money to pay off their credit debt and would leave me with $100,000 in equity.

I'm thinking I could take a heloc on the house in a year or two and use that as a downpayment on another property, fix it up, refi to pay back the heloc and repeat. The only thing that has me a bit hesitant is that when I run the numbers on the BP calculator, I'm left with a 4% on the cash on cash ROI, .88 % on the 2 $ rule, and a hundred and change in cash flow. So I'm essentially buying the house with no return but hoping to use it as access to the equity for future purchases.

Does something like this make sense or would even be smart to do for a first purchase?  Appreciate your thoughts on this.  

This is a bad idea on a lot of levels in my opinion.

1. By "buying" the house for $200k your parents would essentially be giving you a $100k gift which they may not want to do and may have tax consequences

2.  The 2% rule doesn't work everywhere, but if you are buying something for 2/3 of the actual value and can't even get 1% you have a problem.

3. I am assuming your loan that you qualify for would require you to live in the property which will make it more difficult to rent out (by the room)

Figuring out what the other party's needs are is key to making creating financing work, and it sounds like you're figuring that out.  Good start.

You may trigger a gift tax if you buy it from them significantly under market.  You might look for a plan where you would get a mortgage from a lender for one portion and have your parents hold a note for the balance, and let them gift $30k a year ($15k per parent per year) of that balance to you over time.

Are there things you can do to the house which could increase its value? If so, you may be able to do that and do a cash out refi, which will give you better financing terms than a HELOC. Still, the HELOC may be one easily tappable.

The deal doesn't sound like a fantastic investment on its own.  If it gives you something you couldn't otherwise get (such as parental help to get into housing, or access to your first property that you couldn't get on the open market), those may be factors in its favor.

Aaron - When I sat down with the mortgage broker who would be providing the loan,  he said the deal could be done with what's called a "Gift of Equity" so I would get a conventional loan but not have to put any money down.  It would be a normal 30 yr loan on the house so it wouldn't require me to live in the house at all.  I'm not too familiar with all the ins and outs of it all so that's why I was looking for advice from folks here.  

According to the broker, he said there wouldn't be any tax consequences on them because it's acting as though it's a normal sale with me purchasing the house.  Is that accurate?  

Brendon - That's one of my main concerns is that looking at it from an "investment" angle, it doesn't look good at all with the low ROI. My thinking was to just use this as a way to get access to funds for future investments that I don't currently have now.

If I stick to going with the CHFA plan, it gets me into a property with no money down but will require me to also have PMI payments.

The way prices are going around here now, going with the CHFA scenario, I would most likely be able to get into a multi-family with more cash on cash ROI but with equity value to low to borrow against for a years. Prices around here are averaging $320,000 and up. Trying to find something to get below market value to have instant equity and that cash flows is hard. That's why it's been two years so far and I haven't been able to find anything.

I also don't want to start out with my first purchase being the wrong decision and being that I'm a newbie,  I'm looking for all the advice I can get.  

@Robert Harlacher just because something is on a 30 year loan does not mean you don't have to owner occupy double check with the lender that you do not have to occupy the home.  

The bigger problem I have with your plan is that you are taking $100k from family who have credit card debt.  Yes they would pay off current debt but if close to retirement their home is their nest egg.

In addition a home that at 2/3 value only gives a 4% return is a terrible investment even in the most expensive of markets.

I'm really not trying to be mean or discourage you from investing but make sure your parents are on board with giving you a $100k gift for you to buy an investment property that isn't fantastic.  You might be better having them sell it for market price and buying a decent investment property that they transfer to you slowly over time.  Any gifts they make to you should be their decision not yours.

I completely understand and appreciate your advice.  Like I said, it was an idea that I had as a way to get started.  I have talked it over with my parents and they're okay with doing it. I was more concerned at the fact that when looking at from a straight investment angle, as in it's not my parents house but a house on the market , the return on it isn't there.  The only upside would be that it gives me access to funds (equity) that I don't have on my own now to get something.  

It's more of a question of does it make sense from a creative financing angle to proceed with or wait it out for who knows how long until something else comes along that I could get with a CHFA or FHA type loan