Refinancing a house that is given to me...?

Question

I am soon to start my real estate investing career when I sepearare from the military next month.

My father mention to me that if I wanted he would sell me his home (that he owns free and clear) for much much lower than it’s worth.

Now I started to consider it, and came up on the thought of, “if I purchased it for much lower, could I then have it appraised and get a larger loan on the value?” Almost like a BRRRR strategy without the rehab part.

This sounds almost illegal and unethical, so I’m just curious as to the answer if there is one to this.

Let me know, thanks!

Chris Levarek · Answer

@Brendan M Brown This is good creative investing. As Nathan mentioned, you would have to ensure that "Loan To Value" percentage the bank loans at covers the purchase price. So if you buy for 200k, and property appraises at 250000, you break even at a 80% LTV loan because 80% of 250k equals 200k. Note, you will most likely need to wait 6 months to 12 months for a "seasoning period" before you can refinance unless you buy with private money or with hard money lenders and even then some banks want 6 months seasoning.

Some banks will loan at lower/higher LTV rates so do your research. This is similar to the BRRRR method but what I would do first is run the numbers. Make sure the new Mortgage payment plus expenses(vacancy rate, capex, monthly repair costs, etc) still allows you to make some cash flow from a renting tenant ie. tenants rent covers the new payment + expenses and then some.

If the numbers work not only do you make some cash flow, you can pull out equity on the property in the form of a HELOC for the difference between appraised value and owed value. The amount you can pull out is dependent on the Home Equity Line of Credit but it could be anywhere from 70%-100% of the equity depending on the HELOC lender.

Chris Levarek

Valkere Investment Group | https://www.valkeregroup.com

Nathan Gesner · Answer

There's nothing unethical about it. Talk to your lender and see what your options are. If you buy it low enough then there may be some equity available for you to pull out at closing. The bank will only give you up to 80% of the equity so you'd have to get it for a really good deal to make it worth your while.

Personally, I would accept your dad's gracious offer and ensure financial stability for a year or two before you try maximizing your debt.

Brendan M Brown · Answer

Thank you @Chris Levarek, this makes a lot of sense and definitely will allow me to make a better decision going forward. Thanks to the both of you for responding so quickly as well.

Brendan M Brown · Answer

@Nathan G. Wow, that’s pretty wild! Apparently my Dad is a real nice guy.

I appreciate the advice Mr. Nathan.