BRRR....will it work for me on this property?

Question

Hello BP Members,

Currently my mom and my aunt own a 4 family home that they had inherited from a family member. The property is paid off (mortgage free) and all of the units are rented. My aunt is looking to sell her portion of the property as she is getting up there in age. My mom would like to keep the property as it currently pays all of its bills and all of her property taxes on her single family home.

I was asked if I was interested in purchasing her half and then have opportunity to own all of it in the near future. The property is very well maintained and rents quite fast.

I do not want to purchase into the property using a conventional loan putting 20%-30% down.

My thinking was to have my name placed on the title of the home as an owner and letting my aunt keep the cash flow from the rents for a year. Then when the year is up refinance with a lower interest rate loan. Essentially this is like receiving a private loan from my aunt and then after it seasons refinance at a lower rate. Is this even possible?

If not what other options do I have? How may I obtain this property with 0 or low money down?

House hacking is not an option for me as I do own a SFH with my wife.

Thank You in advance

David Morgan · Answer

@Paul Papamarkos

Will your aunt sell her half to you with seller financing using a promissory note -- so you get your name on title (with your mom), and you pay your aunt monthly payments until it's paid off? Maybe you can buy it from her that way with little or nothing down, and with a good interest rate. Benefits to her are, she will continue to get monthly checks, she'll make more on it than a lump-sum sale because of interest payments, and she may be able to spread any long term capital gains tax liability out over several years as an installment sale.

Stephanie Medellin · Answer

@Paul Papamarkos  Any appraisal needed will be done through the loan process if they decide to take a loan out.

If your Mom and your Aunt want an appraisal for their own use to determine the value before deciding whether or not to get a loan, then they can certainly do that as well, but that appraisal will NOT be acceptable to a lender, so they will have to pay again.

Stephanie Medellin · Answer

@Paul Papamarkos  If your Mom and aunt are willing, you can certainly go on title for 6 months and then do a cash out refinance with a conventional loan.  The other owners would have to be on board with the refinance of course, as you won't be able to mortgage just your interest.  Will the property still generate the same cash flow for your Mom if there is a mortgage to pay?

Paul Papamarkos · Answer

I'm sorry for the reply and I thank you both for your helpful insight. Due to some health issues my family is having I am going to hold off until the new year to start negotiating a deal. In the mean time I am going to obtain a broker's opinion letter just so I have an idea of what I will be looking at regarding financing.

Thank You Again I will keep you updated.

David Morgan · Answer

There are likely several avenues for you to get the desired results. And a lot of this depends on your relationships with your mom and aunt.

Your aunt might give you a better deal than an appraisal would, so how you decide on price is up to you. Appraisal, comps, broker's opinion letter... or just a number you agree on factoring in any repairs, speed of closing, terms, ease, favorite nephew status, etc.

One way to do it fast and loose would be to tell your aunt you'll pay her tomorrow if she'll quitclaim it to you today, then refinance tomorrow with your mom when you're on title, and pay off your aunt. Pretty sure my aunt wouldn't go for it, but yours might.

Another way would be what you suggested -- your mom buys out your aunt and refinances in the process, then you set up an arrangement with your mom to buy half the property from her either right away or at some point in the future.

But here's what I'd actually recommend: Buy out your aunt with a promissory note, refinance with your mom, and use the bank loan to pay off your aunt. I just found a local portfolio lender who would likely let you do this kind of thing all in one day, but I don't know about lenders who resell their loans on the secondary market.

And with my mom, I'd only get financing for 50% of the property value and I'd just tell her I'd be responsible for paying it off. She's still on the hook as far as the bank is concerned, but I'd let her know I'd take care of it.

But maybe your mom wants more income, so maybe she'd be down for pulling out more equity in the refinance, and then use it to buy more rental property.

Paul Papamarkos · Answer

Thank you both for your great insight!

Ok now can you tell me what my first course of actions is? Do we go out and have an appraisal done for the property? Lets say the price of the property is a total of $400k would it be best for my mother to take out a an equity loan on the property and pay my aunt her half of $200k?

Stephanie Medellin · Answer

@Paul Papamarkos  When you do a cash out refinance and there is currently no loan on the property, you do not have to contribute any funds other than an appraisal fee.  You would be borrowing money against the property up to a certain percentage of the value.  You only need a down payment if you are purchasing the property.

If it's valued at $100,000 you may be able to take 75% of that equity out through a refinance, or $75,000.  The funds will go to you at closing.  The other $25,000 remains as equity.

What I meant by the other point was that the other owners would have to consent to the loan being recorded against the home.  Right now it's generating a certain amount of income.  If the loan has to be paid every month, will the rental income be enough to split between you and your Mom?  Will your half cover the loan payment, and her half be enough to cover her property taxes on her single family home?

Paul Papamarkos · Answer

Thank You David and Stephanie for your replies. My mother is in the process of digging up the deed and seeing how her and my aunt are listed.

David I will not be owning my Mother's half in a year as she would like to hold on to it for about another five years. There is no mortgage for the property and it cash flows well for her after expenses,

I dont think I will have a problem being placed on the deed and doing an interest only note and paying off the rest of the principal after a year when I can refinance.

Stephanie I believe there wouldn't be a problem with them putting me on the title for 6 months but would the cash out refinance with a conventional loan involve me putting down 20%?

"The other owners would have to be on board with the refinance of course, as you won't be able to mortgage just your interest.  Will the property still generate the same cash flow for your Mom if there is a mortgage to pay?"

^^^^^I'm very sorry I am just a bit confused with that last statement

David Morgan · Answer

@Paul Papamarkos

If you're not going to pay your aunt for her half interest in the property for a year, you could do a one-year note with a balloon at the end. You could set the amortization and interest rate wherever they need to be so your  payments to her would be roughly equal to the rental income -- even do an interest-only note if you want -- and then you'd pay off the rest of the principle after a year when you refinance.

The problem will be the refinance. Will you own your mother's half by then?

If you're going to have your mother's interest in a year, either through inheritance, gift, or paying her for it, once you have it, you could refinance and buy out your aunt at the same time, skipping the whole one-year note business. Depending on how you got your mom's interest, there may be seasoning requirements before you could refinance. But if you think your aunt might sell to someone else in the meantime, you're better off either buying and recording an option, or doing as described above and getting on title and setting up a note.

But if you'll only have half interest in the property, you might not be able to refinance, at least, not without your mom's permission -- otherwise you'd be putting a whole house up for security that you own only half of. I'd talk to a bank or mortgage broker and a title company to see what would be possible.

BRRR....will it work for me on this property?

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