Buying Investment House from Parent & Need Help Structuring Deal

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Buying Investment House from Parent & Need Help Structuring Deal

Timmy Fritz
Investor · Austin, TX · Member since 2018 · 20 posts · 17 votes

Situation: Looking for the best way to buy an investment property from a parent who has already paid off the mortgage.

Hi, I’m new to BP and I was hoping to get some feedback from you all! I am in the process of talking to my mother about purchasing a property she bought when I started renting throughout college in Louisville, Kentucky. She wants to get rid of it, and I’m interested in getting into real estate. The home is located in the 40215 area of Louisville, and is zoned for multi-family as the upstairs is an apartment with its own entrance. It’s on S 5th St, and a lot of the homes immediately around it have or are undergoing rehabs. My mother purchased it in 2015 and we have been renting it out to my friends over the years while I live there for free during college. I would like to continue renting to college kids, as I have friends lined up for the next few years. There are 4 bedrooms(including the 1bed apartment upstairs) with each renting for $375-400/mo She owns the house free and clear, and I'm trying to figure out the best way to go about giving her a fair deal that gives both of us the best outcome. In trying to figure out the best way to structure a deal for the property, I’ve looked into the idea of her gifting equity and owner financing.

I've partnered up with two other guys who have raised money from investors and we are looking at other investment properties to continue in real estate. The goal of this house would be for me to continue house hacking it and use this house as leverage to purchase other properties. Is there a way that'd allow me to have her owner finance this and pull out equity in a HELOC or cash-out refinance in 6 months after seasoning while continuing to make payments to my mother going forward? Or is there a better way to do this? Also, can I do this through an LLC or would that hinder my ability to get the best outcome since I would only be a one third partner in the LLC. Thanks in advance for any feedback!

Purchase Price - $70k-85k

Cash Flow Per Room - $375

Property Tax - ~$700 & Insurance ~$500

NOI (50% rule) - $750

OR

NOI: $1500- $105(7%vacancy) - $120(8% PM) - $150(10% repairs) - $58(Taxes) - $42(Insurance) - $250(utilities) = $775

Estimated ARV(current w/ ~$4k of work) - $85k

Estimated ARV(w/ ~20k of work) - $115k

--Will most likely wait to do this until later on since it will only be college students renting

Mortgage 30yr & 5% rate(5% Down) - $485/mo(includes PMI)

@Andrew Whitacre @Salvator Migliore

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Timmy Fritz, if you're looking at owner financing, that can be whatever you agree to with your mother (within reason and the law). You decide the price, the terms, etc.

    Regarding a HELOC, refi, leveraging for other properties, you need to have equity to use it. What I mean is, if you don't bring any cash to the table initially, then there's no cash to get at later, unless you wait a while as you pay of debt and (hopefully) see some appreciation.

    No reason this can't be done with at a LLC. Your mom can sell to whomever she like, including a LLC. Know that if you do refi at some point, the bank will likely require that there is a personal guarantor on the note.

    A few other thoughts:

    What makes you think that an ARV of $115 is possible, even with more reno? Are there comps in the neighborhood that are selling for that much? I don't think that $20k of work will result in ~$45k of value.

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  • Timmy Fritz
    OP
    Investor · Austin, TX · Member since 2018 · 20 posts · 17 votes
    7y

    @Jaysen Medhurst , right but if my mother gifted me equity then I would own the home since she owns it free and clear. Would i then be able to go to a bank and leverage this home through a new loan or Heloc while making payments to her going forward? Not exactly sure the tax implications of this, or whether this is even an option. 

    The neighborhood is odd: within a block radius there's a 3bed 1ba home that sold for as much as $255k within the last few months, it's very nicely renovated but actually slightly smaller than my home although the lot is a bit nicer. Another home that's a 3bed 2ba that sold for 50k within the last year or so that wasnt in great shape. It's a wide range, but the curb appeal of my 4 bed 2ba house isnt great. Exterior needs painted, paint interior, and some other small things and I think it would appraise for around $115k pretty conservatively.

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  • John L.
    Rental Property Investor · Cincinnati, OH · Member since 2018 · 41 posts · 19 votes
    7y

    @Timmy Fritz I think the main issue is identifying what your mother is interested in gaining from the sale. If she wants a lump sum you’ll need to find a way to gain possession by either traditional financing, or possibly a land contract or master lease option and then (assuming you can) refinance after a renovation with a quick turnaround. If she isn’t looking for a lump sum right now you could ask that she seller finance at whatever terms work for you both.

    I’d aim for the latter if possible since you could always refinance and there is less risk assuming the refi will meet your assumptions in the short term. You could possibly do it without partners with this option as well.

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