1st buy & hold deal closed using gift of equity for down payment

12 Replies

Hello everyone,

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)

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). Please tell me what you think here. I'm looking for professional opinions and constructive criticism. I will be happy to provide any other details if I am leaving anything out.

@Jeremy Slater your relative pulled equity from the house (a HELOC i assume...) prior to selling the property to you; which you financed through a traditional lender on a 20 yr. note? Or did the seller transfer the proceeds from the sale (after mortgage payoff) to you? Having trouble comprehending how the equity piece works into the overall purchase price...

@Brandon Sturgill , I had a feeling I was leaving something out.

The purchase price on contract was written up based on the value of the property which is $120k. We then added a gift of equity clause in the contract stating that the seller is gifting no less than 20% to be applied as the buyers down payment with the lending amount set at 85k. Hope that clarifies.

@Jeremy Slater

I'd sell the place and take the equity.  There is little point in owning a rental property that doesn't pay you anything to own it.

Do you cash flow calculations account for Cap Ex?  That should be at least $150/month to account for big future expenses.  If you didn't, REALLY get this place to market quickly.  It may have cost you next to nothing to purchase, but is will get really expensive when you have to do a roof or furnace.

I agree with Aaron. 

On another note when using gifts make sure you ask you lender to ask their underwriter what the rule of the quarter is with gifts. The lender will tell you what you want to hear and most times they don't know these nuances. As a non owner occupied loan you are not allowed to have your downpayment a gift. You can sharpshoot by getting the gift money in your account 3-6 months before you apply because they may not go that far in your bank statements... but check with the professionals.

Originally posted by @Jeremy Slater :

Hello everyone,

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)

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). Please tell me what you think here. I'm looking for professional opinions and constructive criticism. I will be happy to provide any other details if I am leaving anything out.

I don't think the numbers look that spectacular: First, anything that rents at near $100/ft in the Midwest needs to be in a very desirable location or a top quality property (complete rehab) and have amenities (2 BA's and a garage...you only have one bath). Second, the numbers you provided really limit cash flow (realistically if you assume 50% for costs). Third, if this is a non-occupied property, you will have a lot of difficulty pulling any future equity out...and I would assume the bank will not perform a cash-out re-fi on a pure investment property...

My thoughts...live in the house as your primary for the first year...you can do a HELOC and maximize the amount of equity you can pull out (up to 90%)...then move out and rent it.

@Aaron Montague Thanks for the response. I am considering listing it for sale once the renovation is complete but if I decide to keep it I plan on refinancing in 6-12 months so the property will cash flow. Additionally, I did account for Cap Ex in my analysis. 

@Lane Kawaoka Thanks. Our plan with the gift of equity was brought to the underwriters and approved within a couple of days after talking to the lender. 

You said "As a non owner occupied loan you are not allowed to have your down payment a gift." This statement is incorrect. This was a gift of equity that I am talking about.

@Brandon Sturgill Thanks for the advice. I agree it's not a spectacular deal but I think it was a good enough deal to follow through with. Thanks for the information, I will keep it all in mind. 

I think it looks decent actually. @Jeremy Slater

What are your other expenses - Tax, Ins, maint, capex. You should be able to have the tenants take care of all utilities, lawn/snow. That leaves $400-500 for expenses/cashflow, with NO Money out of pocket. Sounds like it could be a winner. Also, could you finish the basement and make it a 4/2 with 1800+ sq/ft? How much would the rent go up if you did that? Refinance and cashflow of $150/mo for a year or two then sell to recapture your equity if you want, sounds like a nice way to acquire $30k. 

PS - If you have a day job - that is sounds like a lot to get done in 2 1/2 weeks. 

Thank you @Dan B.

Monthly Expenses:

Taxes: $150

Insurance $43

Maintenance/Capex: I had this at 10% but quickly realizing I shouldn't be estimating based off of the rent amount (newbie mistake).

Tenants will be paying for all utilities and lawn care.

As far as finishing the basement. I considered it but not sure it will get me where I would want/need to be on the rent. However, it would probably pay off to finish the basement when/if I go to sell the property. 

You read my mind on capturing the equity in a year or two. That was part of my plan from the get go.

I have quickly figured out how overly ambitious my timeline is (I do work full time) so I decided to contract some of the work. Improvement costs won't increase a whole lot considering I called up some favors. 

Thanks again!


David Wooten good to hear from you. This has worked out good so far. The renovation took longer than expected but we got it rented pretty quick for 1k/month to the first person who we showed it too. She passed the checks with flying colors. As far as the gift of equity goes, I would be happy to answer any specific questions you have in private message or this post. Good Luck. Thanks, Jeremy