What is the best loan strategy for this buy and hold?

Question

The situation is a little lengthy, but hear me out..

I am purchasing my childhood home from my mother (my deceased father's rental prop) seller finance. Because she is my mom, I can have her deed the house to me so I can borrow the equity against it or put it up for collateral. Once I have fixed it up and rented it out, I can make seller finance payments to her. So I have that to my advantage.

Here is where things are tricky. I have called my local credit unions and I can't borrow against the house because It has already been gutted and is deemed uninhabitable. My known options are hard money or private lending and then maybe doing a cash out refi, but rates would be high on both ends and will really cut into my cash flow.

I have another rental property with a good amount of equity. In addition, I have my home that I recently purchased with a tad of equity for maybe a Heloc.

Is there another option that I am not thinking of or one of the options listed above that you think would be best?

Here are the figures.

Purchase price $95-$100K

Reno - $100K

ARV of $250,000 - $270,000

ARV Rent $2200

Kayla Elliott · Answer

Thanks for your feedback and advice Patrick & Greg!

I see that you recommend NOT having my mom deed the house over to me in order to borrow against it. I was going to do that in an attempt to get creative with my financing options so that there are no liens on it and I could borrow against it as an option. However, I don't think I will be able to borrow against it due to the fact that I have already gutted it.

She is not in a position to lend a personal loan to me.

My concern is doing the cash out refi on my other rental and causing a new and much higher payment on it that I can't just pay off like a loan. (May also cut significantly into the current cash flow on it)

I know you mentioned not doing a HELOC on my primary, but wouldn't it be advantageous to have the ability to pay off the line of credit instead of be stuck in a payment that is much higher?

BTW, I am not disputing you, just playing devil's advocate and wanting someone to challenge my thinking.

GSE Reno Loan as in like a FHA203(k) or Fannie Mae Homestyle Renovation? Something like that?

Kayla Elliott · Answer

I considered hard money, but I'm not flipping it so I won't have the funds to pay off the hard money unless I cash out refi. She is willing to do whatever necessary to help me get the deal done. I am just unsure of best execution.

Kayla Elliott · Answer

I have flexibility with my mom. I just don't know how to leverage it. She is wanting to help me get this done and will pretty much do whatever is most favorable to me. She just doesn't have the liquidity to help me. It's all tied up in real estate. So I have her willingness as leverage. Just trying to figure out how to best apply it.

I can have an agreement where I make payments to my mom starting at a further date and just not put a lien on the house. Then whatever lender can take 1st position. That was my thought.

I was going to pay the HELOC off by putting a Tennant in the house once rehab is done and using the profits from that to pay off the HELOC. Or I could cash out REFI and pay my mom off and probably a portion of the HELOC.

I am really not wanting to flip but to hold it. It's also my childhood home. Not that I should consider that when investing, but I am going to anyways. I still think it's a good investment based off the numbers above regardless.

So it sounds like maybe a HELOC would be the best route, all things above considered?

Your help and advice/opinions is much appreciated.

Matthew Tyson · Answer

Get a personal loan from SOFI for $100k. Finish remodel. Deed to LLC. Get tenant in place. DSCR refi out (maybe put both properties on in one portfolio loan). Pay off personal loan. Do it again. Or talk to a private lender about delayed financing. Then refi out when done.

Rick H. · Answer

Working this backwards, what I see is a 3rd party trying to benefit from another’s house via rental cashflow,

My only business is 30+ years as probate estate and trust lending in CA. I see many situations where one generation wants to buy out a prior generation or, more typically, siblings. Mom’s estate plan should probably address this separately from you.

Private (hard) money might help with renovation but will be pricey. Not sure what you’re bringing to the table beyond willingness. Could/would Mom be willing to add you to title and you both sign for a mortgage, once renovations complete? Should your mom pass away before you, the loan could not be called due,

Patrick Roberts · Answer

FHA 203k wont work unless youre going to live in the property as your primary. Freddie has a reno loan product that can be used for investment properties; this is only for first position, though.

For the Heloc - it goes back to whether your mom wants to continue carrying the loan for income, and if so, how will you pay off the heloc once the rehab is complete? In other words - if you do not cashout refi either the new property after rehab or the existing rental, then where will you obtain $100k cash to pay off the heloc?

I would only use the heloc if you plan on cashout refinancing one of the properties to pay it off once the rehab is complete. If your mom continues to hold the 1st lien on the property, you would need a 2nd position equity loan product for investment properties to stack behind this to extract your rehab funds. While these technically exist, these are typically difficult to execute and are very expensive. I also suspect the vast majority of lenders will take exception to your mom being the 1st position lien (look up strategic default). I also wouldnt let your mom go into 2nd position on an investment property with any sort of restructuring; it doenst sound like she's in a position to risk being wiped out.

Overall, though, if you want cashflow on the new property but cant achieve that after a refi into a market rate loan, it probably makes more sense to just flip it, pay off your heloc and your mom, and use the remaining capital for the next deal.

Patrick Roberts · Answer

If Im understanding correctly, youre buying the home from your mom who will take a first position lien on the property in exchange for carrying the $100k of the purchase price on a private note. You're also trying to raise another $100k to rehab the property to get it leased up.

If your mom is wanting to keep the note in place once the property is stabilized for personal income, I would probably cashout refi your other rental that has equity and use that cash for the rehab of the new property. This is likely the cheapest and simplest pathway. If your mother does not want to carry the note long term, there are GSE renovation loans that can be used for both purchase, rehab, and permanent financing all in one loan. Another option is hard money for the purchase and rehab, which is paid off with a Rate/Term or cashout refi afterward.

I would not have her deed the house to you so that you can borrow against it if she's selling it to you and not giving it to you. This will create a huge mess. I also would not use your heloc unless you plan to cashout refi one of the properties once the rehab is complete - if you dont cashout refi one of them, you wont have any way of extracting the rehab funds to pay off the heloc.

The only other options I can see are A) your mom partnering with you rather then selling the property to you - you become 50% owner and bring the funds and management to the rental while she provides the existing equity as her contribution; or B) your mom lending you the rehab cash out of her personal funds while also seller financing the house to you.

I doubt that any serious lender is going to lend you construction funds in second position behind your mom's purchase-money lien on a distressed property. If anyone does this, theyre likely doing it as a favor and not a for-profit venture.

Greg Scott · Answer

Given your assumptions, you are not going to be able to get enough of a loan to fully cover the rehab, even with a hard money loan, so you'll need to pull in cash from elsewhere.

One possibility is to have your mom sell you the house with a personal loan, not one attached to the property.  That way, you could use Hard Money to fully fund the rehab before refinancing to agency.  There may be tax implications to that maneuver, so check with a CPA.