Using Cash-Out to Buy, Reno and Lend
Investor · Brooklyn, NY · Member since 2021 · 29 posts · 8 votes
Where I'm at today:
A) getting 1.2m cash-out of my 8 family in Brooklyn, at 5.75/ 30 year adjustable with $60k in closing costs (NYC Mtge tax is 2.8% so that's 33,400 right there). ** How's that sound? Are there better terms?
B) lending 500k of that 1.2m to the seller of:
C) a 2 family I'll be leasing with option to buy in 5 years for 1.5m. (We'll subtract the balance from the 1.5 - will bring it down to about 1m)
D) I will restructure the property from 2 to 3 apts, potential 9k/mo rental income after reno. 4 mos with no income?
E) thinking 4 mos and 300k for reno
F) I will have 700k to lend (PML) and invest
I'd really be grateful for your feedback, suggestions and recommendations for NYC attorneys and other. As complex as this deal is, the most difficult thing is finding capable, smart people, esp, an attorney. Hoping to find an attorney experienced in
1) Executory/Lease-Option,
2) Mortgage/Promissory Note,
3) Private Money Lending
. 4) LLC
Where I'm at today:
A) getting 1.2m cash-out of my 8 family in Brooklyn, at 5.75/ 30 year adjustable with $60k in closing costs (NYC Mtge tax is 2.8% so that's 33,400 right there). ** How's that sound? Are there better terms?
B) lending 500k of that 1.2m to the seller of:
C) a 2 family I'll be leasing with option to buy in 5 years for 1.5m. (We'll subtract the balance from the 1.5 - will bring it down to about 1m)
D) I will restructure the property from 2 to 3 apts, potential 9k/mo rental income after reno. 4 mos with no income?
E) thinking 4 mos and 300k for reno
F) I will have 700k to lend (PML) and invest
I'd really be grateful for your feedback, suggestions and recommendations for NYC attorneys and other. As complex as this deal is, the most difficult thing is finding capable, smart people, esp, an attorney. Hoping to find an attorney experienced in
1) Executory/Lease-Option,
2) Mortgage/Promissory Note,
3) Private Money Lending
. 4) LLC
A lot of of what you say sounds really scary from an investment perspective.
First there is the word "Adjustable" - how often does that reset? What if rates are higher when it resets... could be $1000 a month more on a payment potentially if it reset to 7%?
The "What if's" are really scary - What if the person you lend $500,000 to... pick the ending: dies; has a tax lien put on his property; has his property value depreciate to where it is worth a lot less in 5 years; needs to sell the property sooner; doesn't want to sell the property in 5 years because now it's worth $3 million, etc, etc. Just seems like lots of scenarios that could wreck havoc there. Whatever you do, be sure to get a lien on the property (not just a mortgage and a note)... but know you will likely be in second position behind the original mortgage company of his - unless he owns it outright? In which case why does he need a $500,000 note when he could just borrow from his own house?. If he has little equity in his property and he defaults on his payments, you likely aren't covered in equity on your lien if he goes into foreclosure. I would definitely find a really good real estate attorney for this, and it's entirely possible he will try and talk you out of this deal - or at least change the way it is set up!
Next - If I'm reading this right, you are doing improvements to a property you won't technically own - you just have an option to buy. What if YOU (or he) wants out along the way... you now have sunk $300,000 into the project that isn't yours - how will that all work if the 'situation changes'? I think I might ask to be added as a co-owner of the property. You can establish a percentage ownership with the property appraiser. That would at least help secure your position.
Your "no income" period could totally be a miscalculation. We got tied up for 6 months going through permitting for new windows at the end of a project. Cost us an extra $50,000 to bring a 1925 house to 2022 code. Still made money, but not like what we thought we were going to.
You will be starting out $93,000 in the hole between closing costs and taxes. You say what your potential income will be, but not what your lease expense will be on the property, so it is hard to know how good a deal you are getting as to your ability to pay back your note - which just the P&I will be $7,000/month.
Seems like lots of moving parts, with lots of potential to go wrong. Hopefully it goes right for you, but doing major improvements to a property you don't own would be tricky / suspect in my book! 5 years is a long time to be bed-fellows with another person on a property where you may have competing interests down the road. A lot can change in that amount of time.
Wish you all the best!
Randy
Where I'm at today:
A) getting 1.2m cash-out of my 8 family in Brooklyn, at 5.75/ 30 year adjustable with $60k in closing costs (NYC Mtge tax is 2.8% so that's 33,400 right there). ** How's that sound? Are there better terms?
B) lending 500k of that 1.2m to the seller of:
C) a 2 family I'll be leasing with option to buy in 5 years for 1.5m. (We'll subtract the balance from the 1.5 - will bring it down to about 1m)
D) I will restructure the property from 2 to 3 apts, potential 9k/mo rental income after reno. 4 mos with no income?
E) thinking 4 mos and 300k for reno
F) I will have 700k to lend (PML) and invest
I'd really be grateful for your feedback, suggestions and recommendations for NYC attorneys and other. As complex as this deal is, the most difficult thing is finding capable, smart people, esp, an attorney. Hoping to find an attorney experienced in
1) Executory/Lease-Option,
2) Mortgage/Promissory Note,
3) Private Money Lending
. 4) LLC
A lot of of what you say sounds really scary from an investment perspective.
First there is the word "Adjustable" - how often does that reset? What if rates are higher when it resets... could be $1000 a month more on a payment potentially if it reset to 7%?
The "What if's" are really scary - What if the person you lend $500,000 to... pick the ending: dies; has a tax lien put on his property; has his property value depreciate to where it is worth a lot less in 5 years; needs to sell the property sooner; doesn't want to sell the property in 5 years because now it's worth $3 million, etc, etc. Just seems like lots of scenarios that could wreck havoc there. Whatever you do, be sure to get a lien on the property (not just a mortgage and a note)... but know you will likely be in second position behind the original mortgage company of his - unless he owns it outright? In which case why does he need a $500,000 note when he could just borrow from his own house?. If he has little equity in his property and he defaults on his payments, you likely aren't covered in equity on your lien if he goes into foreclosure. I would definitely find a really good real estate attorney for this, and it's entirely possible he will try and talk you out of this deal - or at least change the way it is set up!
Next - If I'm reading this right, you are doing improvements to a property you won't technically own - you just have an option to buy. What if YOU (or he) wants out along the way... you now have sunk $300,000 into the project that isn't yours - how will that all work if the 'situation changes'? I think I might ask to be added as a co-owner of the property. You can establish a percentage ownership with the property appraiser. That would at least help secure your position.
Your "no income" period could totally be a miscalculation. We got tied up for 6 months going through permitting for new windows at the end of a project. Cost us an extra $50,000 to bring a 1925 house to 2022 code. Still made money, but not like what we thought we were going to.
You will be starting out $93,000 in the hole between closing costs and taxes. You say what your potential income will be, but not what your lease expense will be on the property, so it is hard to know how good a deal you are getting as to your ability to pay back your note - which just the P&I will be $7,000/month.
Seems like lots of moving parts, with lots of potential to go wrong. Hopefully it goes right for you, but doing major improvements to a property you don't own would be tricky / suspect in my book! 5 years is a long time to be bed-fellows with another person on a property where you may have competing interests down the road. A lot can change in that amount of time.
Wish you all the best!
Randy
Hi Randy. I appreciate your very thoughtful response. I'll clarify some things The loan may adjust every 5 years and I'll have option to prepay (and get out of it) at those times. The rate will be around 3% over fed funds rate (5 year treasury)
The borrower is the seller and so I plan to use the house I'll lease as collateral. It's entirely paid off- no mortgages or liens (I checked); Essentially she'll pay off her loan by deducting balance from my 1.5m purch price. *You said I should get a lien on the property as well. How do I do that?
We'll file a Memorandum of Contract with the county clerk which refers to our signed, notarized Executory contract. That's binding so she won't be able to reneg.
Ill pay 8,000 lease per month plus the 7,000, but will collect 3,600 mortgage payment. (11,400) Hopefully, I'll be collecting 8000/mo rent within, let's call it 6 mos.
I'll have the cushion of the remainder of the 1.2m
Bbbbut, if I dont make money on money I'm paying 5.75% for (but with closing costs, the real cost of the money is more than that), I lose