rental property deal. yes or no?

Question

Hi, Newbie here. A deal has come up from a brokerage firm. Home is Cash $110000, their estimated CMA is $155000. Has a month to month tenant paying $1075 in rent. They say needs cosmetics only. Good area, nice subdivision. Comps are avg 145K-155K. One of the comps is 2 blocks away. The brokerage estimates $1500 rent, after cosmetic update. Sounds reasonable on the surface.  Im considering drawing the cash from retirement savings, they hold 20% for taxes. I then would get a conventional loan to get my cash back out of it. Am I missing anything? What would the tax implications be if I structured it this way and does the deal sound reasonable? Thanks

Anthony Arnt · Answer

Andrew, The firm recommends you do your due diligence. I have a relative that has used them and said they are usually pretty close in their analysis, but I understand, always proceed with caution. I get what your saying, Im probably searching more for the actual pros and cons on the structuring of this deal or a similar one when Im ready to pull the trigger.

Anthony Arnt · Answer

The pension savings withdrawal is in a W2 format with federal income taxes withheld(they use a flat 20%), if that helps.  The brokerage firm thats selling the property requires quicker closing than a conventional loan can provide, which would require me to pay cash from some source.

Thomas S. · Answer

If you can get $1500 in rent it is OK otherwise it is a bad investment.

Do not trust the brokerage estimate of $1500. Research the market yourself as they are likely intentionally overestimating the market rents to sell you on the property. This is very common and you can not trust anyone. If you can not find the proof of the market yourself do not invest in the property.

Anthony Arnt · Answer

I'm sorry Michael, I should have made it clearer. I'm pulling the money from retirement savings and they withhold a flat 20% for federal income taxes. I don't actually lose the 20%. Thanks Rob, Im not sure about the conventional loan on investment property, I was just trying to come up with an alternative plan to avoid hard money, and wanted to know if that was a good idea. Thanks

Rob Lane · Answer

I don't think you can get a conventional loan on investment property only on owner/occupant.  The numbers sound good if you can get the $1500 month rent then it would be nice cash flow.  Break even at the current rent.  Try this, pay cash for the property, do your cosmetic fixes, go to your local bank, pull out a 15 year note (I always like to do 10 or 12), pay back your retirement savings.  If the house appraises for $145,000 which is the low end of comps, you look like you are at the 80% loan value.  Numbers look like they work.  Hope this helps

Michael Totman · Answer

I'm no tax or retirement expert but if this is a good deal why lose 20% of your retirement cash instead of paying 5-6% in mortgage interest? Your plan is to get your cash out with a conventional loan later which would already require you to pay the mortgage interest, so you took a short term loan for 20% for nothing it seems. Seems like even hard money would be cheaper than that no?