Private Money Investor - First Investment Property

13 Replies

I am on the brink of purchasing my first investment property. Below are some of the stats on the property.

The home is currently occupied with an elderly tenant (92 YO) and we are looking to purchase the home well below market value. However the catch is that she want to remain living there (with her dog and cat) for as long as she lives. The house is in good shape and would require little rehab; mostly cosmetic issues. 

We are looking to purchase the house for $85,000 (Market Value on the house is $124,000) but will need a 25% down payment. We have an interested party (private investor) to secured the down payment for the house with interest gained on their investment. The problem is that I will not get alot of "cashflow" from this investment as long as the elderly tenant lives there, (I.E. we will only get $150/month cashflow which will be used as a maintenance fund)

The big question is how can I entice the private investor to commit. I am unsure how quickly we would be able to pay the investor back.

 Any advice is much appreciated.

I am looking for creative ways on paying off my private investor.

IMO option the best way to "entice" an investor is by presenting a solid deal, where they know their money will be secure.  Your numbers are too vague to tell if this is the case.  

You live in Ft Worth, I would go to the REIA and get a private lender.

When you are dealing with the ELDERLY, you could have a problem with competency.

You may want to look at a Life Estate agreement, but I would check with her heirs.

@Bill Gulley has awesome advice.

@Maegan King

What bothers me it seems predatory.

If that was your great grandmother, how would you feel?

@Brian Gibbons  She is a neighbor of mine and I have helped her numerous times with around the house type projects WILLINGLY. I like to help her out because I do look at her as if it were my own grandmother. 

This property is what started my research in real estate investment. She actually approached me about wanting to sell her house. Her main reason to sell it to me is because she would be able to stay in the house with her animals as opposed to moving into an assisted living type place.

I think it is a great way for me to get my feet wet in real estate investment. I am just not sure how I will be able to pay off my private investor ($32,000) in a timely manner. It is my understanding that in most situations I could rehab a distressed house and then refinance  to payoff the investor. I won't have the ability to rehab since the house will be occupied. With little cash flow coming in i'm not sure how to creativity pay back my investor.

I suggest you have the current owner provide a carryback note for the $32K.  The owner will likely accept a reasonable interest rate, otherwise they will just put the money in a CD.   

@Dan Brewer That is a great idea, thank you!

@Brian Gibbons I didn't even think about competency, will need to discuss with her. Thank you for your advice.

@Maegan King

 Dealing with the elderly is very risky, not from the point of view so much of the elderly person, but their heirs. If you do a deal with an elderly person without the knowledge of the primary heirs, those heirs will just about always start kicking thinking granny was ripped off. Bet on it! 

Even having a relationship with her, which is very good, her heirs can untangle any agreement she makes if it is not at or near the market value. To a judge, the elderly are a protected class in reality. There are also "Elder Laws" that may be played putting you on the defensive. 

Another issue is Medicare, actually this is a risk for most people, but especially the elderly. If she isn't loaded with insurance and is wealthy, she won't have the funds to stay very long in an assisted living or nursing home and will look to Medicare to kick in to pay the tab.

I won't go into the assessment of assets for the determination of benefits, but her home that she owns and occupies as her residence is excluded. If she sells it, any assets she receives, cash, notes, horses, whatever, becomes a conversion and those assets are included in the determination. Medicare has a 7 to 10 year "look back" at transactions they can pull back for this determination. They can apply the value of those assets to the amount required to be paid by the client or her estate before she is eligible for benefits, and if they see that the transaction was done to avoid paying costs to  qualify for benefits the deal can be invalidated and that is messy. And all of this is not in your control.

If the heirs end up making up the difference from your price to  the market value, I suggest you expect a civil suit for your predatory transaction. Now, you're back to the judge and that "protected class" area and dealing with her competence, the heirs usually win if she doesn't appear in court.

You haven't shown her problem as to why she wants to sell. She knows she won't be around 20 years from now, maybe not 10, she could pass on any day. She may think having money would be easier to manage in her estate, and it would be. She may want to get out of the maintenance and upkeep, a common issue for the elderly.

You also haven't mentioned where the other $50K is coming from, if you expect to get a loan with the down payment borrowed, you'll have a problem without experience and other assets.

Paying back an investor usually comes from the future sale of a property or refinancing it as equity  is established with appreciation. You can't payoff a $35K loan with a decent interest rate in 3 or 5 years making payments alone, you'll be in a deep hole each month. 

As Dan suggested, she will probably be better off in a seller financed transaction. That note needs to be highly marketable since the payments can't pay for her future medical care, the note is usually required to be sold if she applies for benefits. 

She can also transfer the property to a Trust with her having a life estate. You can obtain the property through the Trust. Do not use a business entity like an LLC with her in that entity while living in the property.

I suggest you do two things. 

First, you and she need to see an attorney, she needs to have her affairs in order, call it some estate planning and she can pay for the costs, or you can or both of you can, but the attorney can only represent one party. 

Secondly, get the heirs involved, at least inform them that granny is selling the house and is going to an attorney with you. First thing they want to know is how much, so be prepared to justify the price. They may not care. They usually don't want to pay for maintenance on a property or make repairs, unless they grew up  there and expect to move back, but that isn't usually the case. Be positive in solving their problem they don't see yet and the owner's.  

Dealing with the elderly is a totally different ball  game in real estate and there are mine fields that new investors need to recognize outside the RE strategy game. See an attorney! :)



@Bill Gulley Wow thank you for all of the advice. I feel that we are definitely going to have to seek legal advice. From what she has told me she is financially secure, she has no immediate family other than a step grandson. Which is why I have been helping her with house work so much, I honestly feel bad for her and don't want her to get screwed over by someone else. Another RE investor in our subdivision approached her wanting to do a reverse mortgage to obtain the property. I tried to tell her it would not benefit her near as much as it would the investor.

As for the 50K, I was pre-approved for a 15yr fixed investment loan through a credit union. I asked them about the down payment coming from an investor and they said it was no problem.

I will discuss with her the seller financed option, just worry that this may be getting over my head for my 1st investment property. : /

Thank you for all of you help, it's much appreciated.

A reverse mortgage is probably better when the owner is younger as the value is discounted to mortality tables, at 92, that table only goes to 100, not much of a discount and interest or their yield begins clicking at a higher amount. The property can be sold, but the lien holder will have a higher payoff amount and you might be better off negotiating the lower amount as a sale price. You can't assume a reverse mortgage. 

I've also originated a 30 year fixed rate cash out refinance to a guy in his 90's, he qualified and you can't discriminate on age. He stayed in the property for the year investing the money and making the payments, then we did an installment deal later and he moved in with family.

Lots of ways to approach a transaction, extra care needs to be taken when dealing with the elderly, it's good to hear you'll be using an attorney! Good luck :) 

Originally posted by @Bill Gulley :

A reverse mortgage is probably better when the owner is younger as the value is discounted to mortality tables, at 92...

I'm sure no expert on reverse mortgages but I think that works to the advantage of an older person.

I assisted (as a friend) a 83 yo person obtain a reverse mortgage and she was able to get $1497 per month.  If she had been 65 she would have only gotten about $650 per month on the same house because of her longer life expectancy.  

How do reverse mortgages work? Any risks?

Originally posted by @Richard Dunlop :
Originally posted by @Bill Gulley:

A reverse mortgage is probably better when the owner is younger as the value is discounted to mortality tables, at 92...

I'm sure no expert on reverse mortgages but I think that works to the advantage of an older person.

I assisted (as a friend) a 83 yo person obtain a reverse mortgage and she was able to get $1497 per month.  If she had been 65 she would have only gotten about $650 per month on the same house because of her longer life expectancy.  

It's basically an insurance annuity to 100 at 83 they have 17 years to collect, your example 17 years to collect @ 1497 a month is 305,388. At 100-65 = 35 years @ 650 a month they get 273,000.00. There is a longer period for interest and fees to accrue at a younger age over the expected period. 

If either dies, the payments stop, the heirs must pay back the amount with interest and fees if they want to redeem the home. Or, they can walk away, the property is sold and usually the property sale proceeds won't exceed the loan, if they do, the remainder of the sale proceeds can go to the estate or however it was set up. 

It gets deeper, appreciation expected is discounted and the market value is considered as of today. When its all said and done, the costs of administration of a 35 year contract will be more than twice the cost of a 17 year contract, allowing a higher present value to be disbursed today.

That's how I see it. But yes, the older you are the more you get monthly. 

Or, you might do better on an occupied home, cash out refi, invest the cash and do the same thing they are doing. The heirs can payoff a lower loan amount or give the deed from the estate, bad credit won't hurt after you're gone. I mean, the game is over some day. :)    

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