Closed on 1st buy & hold using gift of equity as down payment
Hello everyone, I posted this on the wrong forum this morning but hopefully this one is the correct one.
I wanted to share the details of my first buy & hold investment property, located in Collinsville, Illinois, to see what you all think. The property was purchased from a relative who gifted more than enough equity to use as a down payment.
The agreed upon price was $80k. The large gift of equity (~35%) allowed us to tweak the numbers around to get all closing and prepaids with the exception of only $100.22 OOP (the lender came up with the OOP #, it just had to be > $0)
The purchase price on the contract was $120k with a gift of equity clause basically stating that no less than 20% of equity will be gifted to buyer to use as the down payment with the loan amount set to 85k. The additional 5k that we added to the purchase price paid for closing costs and prepaids.
Property details:SFH 3/1, 1080 sq. ft. w/full unfinished basement.
Appraised Value: $120k
Loan amount: $85k
Improvement costs: $3k
Based on analysis the property should rent for $950-1050/month
Cap Rate: 8%
Loan details: 20 yr. fixed @ 4.5% = $538/month
The lender got me here. They had me pre-approved for a 30 yr. fixed @ 4.25 which would have given me an estimated cash flow of $150/month. A week or so before closing they told me their secondary investor couldn’t do a 30 yr. on an investment property that included a gift of equity but they could do the in-house for 20.They also stated that they could refinance in 6-12 months to a 30 yr. With this change the cash flow goes to nearly $0. Given the amount of equity in the property and its potential to cash flow after a year, I decided to go through with the purchase.
My wife and I are doing the work to get it ready to rent which should take no more than 2 ½ weeks. Improvements include bathroom and kitchen updates, painting, new doors and trim throughout as well as some deck repair.
I did my research and found this to be worth taking on but I'm also a newbie that has only completed one deal in the past (flipped a SFH successfully). Hope to get some professional opinions on this deal. I would be happy to answer any questions regarding the deal or adding more details if I left anything out.