Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
Hey Y'all.
I've been working hard to find the right investment property, and I think I have found the one at this point. It's not on the MLS - older gentleman is selling off his units. The cash flow is great. He is asking for $205,000 as the sale price. I need to hit 25% for the downpayment to be able to qualify for a conventional loan. This is right around 51K. I'm about 5-10K away from having this, depending on what the closing costs are. My question is - how do I get the remaining 5-10K? I have enough to cover that in a retirement account, but I would prefer to keep that as a safe haven / "reserves" account of sorts.
I'm afraid of not having the money in time to "seal the deal", as they say. I have thought of a few options, but they are drying up:
1) Close friend. He's all tied up in equity and mortgages though. So no go. 2) Family: Eh, didn't work out, when I asked. They are anti-real estate. 3) I own my car out right. It's valued about 2x the loan I'd want. So perhaps pull a bit of credit on that? 4) Cash advance on a credit card. Holy expensive, no? 5) Hard money lender. Would anyone even take on such a small loan?
Thanks in advance for your advice and thoughts. :)
Real Estate Broker · Manchester, NH · Member since 2014 · 630 posts · 420 votes
10y
If he's trying to minimize his capital gains tax, why not trying to negotiate a seller-financed deal @Filipe Pereira? You could get a lower downpayment, but pay a higher monthly rate so as to make up for it.
Investor · Livingston, TN · Member since 2016 · 155 posts · 112 votes
10y
Talk to the seller and see if he would come down. Not sure if you've negotiated price with the seller yet. Never hurts to ask if he would come down to where you are at the moment. The worst he could say is No, then move to your list of back-ups. @Filipe Pereira
Real Estate Broker · Manchester, NH · Member since 2014 · 630 posts · 420 votes
10y
So long as it conforms to the loan guidelines, put the clause "Seller is to contribute X dollars towards Buyer's pre-paids and closing costs," and then negotiate a higher sales price so the seller nets the same amount, but you basically wrapped the costs into the loan. I believe for a conventional 25% down you can have up to 2% of the purchase price in closing costs covered, but I'd check with the lender.
Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
10y
I have considered this @Cody Campbell. Still need to see the remaining units before I try to talk him down, but I think this is his "take it or leave it" as it is priced VERY well for what it is/income it generates.
Thanks @Matt Lefebvre. It's worth considering. At the same rate, I believe the seller wants it to go as low as possible, (while still making financial sense to him, of course) due to the capital gains he is expecting to pay come tax time...so I am not entirely sure that is an option.
Real Estate Broker · Manchester, NH · Member since 2014 · 630 posts · 420 votes
10y
If he's trying to minimize his capital gains tax, why not trying to negotiate a seller-financed deal @Filipe Pereira? You could get a lower downpayment, but pay a higher monthly rate so as to make up for it.
Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
10y
I tried that as well @Matt Lefebvre he didn't seem keen on it, but that was only our first or second time meeting him. I would prefer that route, if the rate is low enough, because that way I would not have to live there. (=more income) Might have to try him again on that. Right now I am able to get a 3.375% rate though, and I feel that is pretty darn good.
Real Estate Broker · Manchester, NH · Member since 2014 · 630 posts · 420 votes
10y
Prepare a presentation showing the pros and cons of each option. Say "If you received $200,000 in cash tomorrow, the government would take $X as capital gains tax. But if you finance the sale of this property, you could stand to gain $250,000 at a lower tax rate" or whatever the numbers happen to work out to be. Preparedness is your friend :)
Real Estate Broker · Manchester, NH · Member since 2014 · 630 posts · 420 votes
10y
I think just laying it out at a standard capital gains tax as if he owned the property free and clear. Its not feasible (and he might find it a little weird) if you guess at exactly how much of his mortgage is paid off. I'd just go for the big number and let him do the math when he realizes what he'd have to deal with based on where he's at.
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
10y
Top option: if you have at least $20k in a 401k, take take what you need out as a loan (up to 50% or $50k, whichever is less). It doesn't affect your personal credit.
Next option: talk the seller into writing a short term, high interest, second mortgage/carry back. You'll have to do ALL of the upfront work here. Surely someone on BP can originate and service a note in your state.
If you want, take a loan out against your car to pay back either of the above loans quickly. Do NOT take a loan against your car prior to closing the mortgage, unless you know for a fact that it won't kill your DTI ratio.
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
10y
Matt Lefebvre , if the seller is subject to capital gains tax either way. If the seller carries back, he/she will also have ordinary tax due on the interest income. The seller will get more cash in total than by not carrying back, but it is subject to the higher, ordinary, tax rates and carries the risk of default.
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
10y
Can't edit on iPhone.... Not "if the seller..." The seller IS subject to cap gains tax either way, unless this is a personal residence and a section 121 exclusion is taken.
Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
10y
Thank you @Dan Schwartz, "unfortunately", I'm only 23 and graduated/started working about a month ago, so I don't have a 401K to pull from. The retirement account I have is something I started for myself back in high school, but again, if I don't have to touch it, I'd prefer not to.
I don't mind doing work if it means getting the deal. Hopefully my awesome real estate agent @Rick Santasiere knows a thing or two about what you're talking about...because quite frankly I can't say that I do.
I have no debts in my name at this time. I don't think the car note will kill my DTI.
Real Estate Agent · Highland, UT · Member since 2015 · 407 posts · 272 votes
10y
What about finding a lender who can do a lower down payment and you prepay your mortgage insurance. I know a lender who has a 10% down investor loan locally you might be able to go that route. Check out your credit unions.
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
10y
Capital gain is based on the sales price. You only pay taxes on the principal portion received so him taking back a note allows him to collect interest on money that would have been paid in taxes to the government as capital gains tax. Nothing better than collecting interest on other people's money.
Plus, what is he going to do with the money? Put it in the bank and collect .0001%? Better to "lend" it to you and get 5-6%. Of course, that is only $50/year, but that is a free dinner at a decent restaurant AND it gets the deal done which is the most important issue here, not the money.
Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
10y
So just to clarify @Aaron Mazzrillo you are saying that if he wants 205K, and I can't quite meet that, that I should ask him to sell it at 215K, and ask for 10K buyer's credit? Am I understanding this correctly?
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
10y
Uh, no. He wants $205K so you give him $205K.. or less which is the route I'd go.
I don't recall how many units, if you even mentioned it. If it is 2-4, you'll have a hard time doing the seller carry in the acquisition escrow, but you could do it right after. So, his money stays in escrow, they draw up a note and DOT, if that is how they do it in your state, then he gets the note for the $10K that you need instead of the $10K in cash.
If it is 5+ units, you might be able to do it as part of the purchase. Just depends on your lender and if they will allow it.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
The car loan is the way. Car loans have cheap interest I can usually get them for 2-3 %. HOWEVER you prolly can't do it now as it may change your DTI and most certainly will be a hard credit hit. Both will affect your financing and or interest rate. Lesson here is get the car loan when you start saving for the next down payment. RR
Uh, no. He wants $205K so you give him $205K.. or less which is the route I'd go.
I don't recall how many units, if you even mentioned it. If it is 2-4, you'll have a hard time doing the seller carry in the acquisition escrow, but you could do it right after. So, his money stays in escrow, they draw up a note and DOT, if that is how they do it in your state, then he gets the note for the $10K that you need instead of the $10K in cash.
If it is 5+ units, you might be able to do it as part of the purchase. Just depends on your lender and if they will allow it.
It is a 4 family. Thanks for clarifying. This is my first acquisition, so I am only vaguely familiar with some of this, and new to all of it.
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
10y
Just make sure you know your numbers. Many "older gentleman" pretend like they are looking for an out to simplify their life, but in reality, they're looking for a mark to take to the cleaners.
Real Estate Broker · Granby, CT · Member since 2015 · 694 posts · 317 votes
10y
@Aaron Mazzrillo hit the nail on the head with this last statement. The seller is very aware of what he is doing, but he does, in fact, have a nice cash flowing property. Dealing with him off market (as we are) is allowing us to get in before other investors do. For the record, one was on MLS, we put in a full price (minus a small seller concession) off, and he went with another offer.. Point being, he is trying to simplify, but is also pricing aggressively enough to "dangle the carrot" for anyone to bite. I am just glad that we are in the position we are, because even though he is looking for a certain #, at least we know where we stand and what we are willing to accept in terms of cashflow, whether you are using a simple Cap Rate, it works.
I like the car note idea for sure. You can get $$ for 2-3% for a purchase, so my guess is a re-fi would be 4-5%. The largest problem I see (as someone mentioned) is the DTI getting higher. I get the feeling though, that the slight change in DTI may not make a difference depending on what the lender is allowing you to use as future stated income from the property. Your first piece of business is to call your lender (after you calculate the monthly liability the $10k you are borrowing will bring to your budget), and just lay it on him. He plugs it in, and says, "ok, its a good idea," or "you might not want to do that." My guess is that it would be all good.
Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
10y
Be careful when borrowing to come up with the down payment. Your lender will ask for copies of your bank statements and if there's barely enough to cover the down payment, they'll track it backwards to see where it came from. If its out of the ordinary, like a $10,000 deposit seems like it would be, they'll ask where it came from. If you say its a loan to family/friends etc, they'll look at it like a second lien, and could increase your interest rate or deny the loan. If it were me and I had just gotten out of school, I'd stop eating and whatever else it took for the next 30 days to save up the difference between now and closing.