Which purchase option to secure this deal ASAP!?

Question

Hey everyone. Wanted to get some opinions on my options here for a house I am looking to buy form neighbors. I am trying to figure out what would be the most cost effective/rapid way to do this.

1- My original plan was to purchase ($300k) with 5% conventional. Use private money for renovations, then refinance 6-12 months later after renovations. Cash out refinance for 80% LTV of $550-$600k after repair value. Pay off original loan and private money and have new mortgage for ~$450k. Built in 20% equity with theoretically no money out of my pocket. 2 sets of closing costs here- at the conventional purchase and then refinance.

The family member who owns the house is not doing great and if she passes away, the house will be put into a trust and will take months to reverse and get that squared away. So now the family wants to do this quick after they finish cleaning the rest of the house out this week. Additionally, I feel interest in property from other people (guy who owns the dumpster company they are using, landscaper, etc.) Although they told me I have first option to buy, anyone can come in here and make a pretty cash offer. These two reason have led me to option 2:

2- Purchase the house in cash. Mortgage would take 60 days to close. Get this sale done quickly with cash so there is less time for someone else to try to purchase it. Also so that the family member doesn't pass and put the house into the trust.

If I purchase with cash, I have no money for renovations. So tap into a 2.99% first yr introductory HELOC since I have 100% equity. Use HELOC for the renovations, then refinance out when renovations are complete. Pay off the HELOC and the $300k private money used to purchase. Three sets of closing costs here: 1st- cash purchase (assuming there would be a small cost here to close- just to my attorney). 2nd- Closing costs on the HELOC. 3rd-Closing costs on the refinance. This might be more expensive with more closing costs but may be worth it to secure the deal ASAP.

Only other problem with option 2 is that I was told I wouldn't be able to get a HELOC until I have my copy of the deed which can take 4 months.

What do you guys think is the best option for me here? Any other advice and ideas are greatly appreciated!

Axel Meierhoefer · Answer

@Eric Telese The All in One loan is the name of a loan product offered by Ridge Lending. I am using them for all my deals. I am not sure why they chose that name exactly, but in my view it is a proper name because it is a 30 year mortgage that acts like a HELOC for an investment property. In the first 10 years you are not required to pay any principal, which is something that would help you during the renovation phase of a property, and then when you are done, all the benefits of a regular HELOC become available. I am not sure if the loan value can be adjusted if you get a new appraisal with the true ARV. That would be something you would need to find out. I can introduce you to the folks at the lender and you can discuss your exact situation with them. The only slight disadvantage to an amortized mortgage I can see is the attachment to the LIBOR as the basis of the interest calculation. On the other hand, the whole world seems to be moving towards zero FED rates, so I think you will not be at risk and if in 5 of 7 years the interest situation changes you can always refi it. Let me know if you like to make an intro.

Eric Telese · Answer

@Jerry Padilla yes I am planning to occupy so i will be good for low DP financing. Not worried about the PMI as it will be under $100/mo- great investment IMO to keep more liquid. Yes the property is livable. That being said, If I used cash, I can tap into HELOC for renovations for low 1.99% 1st yr. closing costs on $150k would be $2500 for the HELOC. I think this is what I am leaning towards. Only thing is I was told i need to wait for deed copy to get HELOC which can take 4 months. I wouldn't have any mortgage holding expense though and can use my own cash to start the rehab.

Axel Meierhoefer · Answer

@Kerry Baird you are welcome. AMEX has been paying about 2% interest and I know its not a lot but much better than checking accounts. I connect it to my company checking and can move funds pretty much immediately.As a general note, I have learned that this is business and everybody I am supposed to get money from takes 30 days to pay me, so I established that as a rule for my payments as well. "Get me an invoice and my accounting department (meaning my wife) will process and pay it".

Kerry Baird · Answer

Thanks, @Axel Meierhoefer, for your response. Thanks, too, for the suggestion for the AMEX savings account. That makes a lot of sense, and is something I hadn't considered.

Axel Meierhoefer · Answer

@Kerry Baird Well, you can only have 2 All in One's anyway and if you think about it you would want to have one on the property with the highest value.There is more to discuss on this. If you have 1 or 2 properties I have always put the vacancy, reserve, CAPEX, etc. into my AMEX High Yield Savings account. You can get an unlimited number of these accounts, so I have one for each property.In my own portfolio, I am now getting to a point where the amount of rental income is such that it does not appear to make sense to stringently putting the money into these savings accounts and let them grow and grow. The issue becomes a matter of probability. In a nutshell, if enough rental income after paying mortgages comes in to replace a roof on a property and you think about how likely that is to happen more than any few years the question becomes how large these reserves should grow. I am still learning myself. Just be aware that there is a difference when having only a few properties versus a larger portfolio (IMHO)

Kerry Baird · Answer

@Axel Meierhoefer, I've got a call in tomorrow. I'm glad to see an investor who is using this product. I'm in a season where I have sunk "equity" in the properties after owning for a period of time, and have also had a number of those pesky expenses that come up, which have also diminished my reserves. Additionally, I've been thinking for awhile now, how it would be nice to use and reuse a line against that equity for new purchases.How do yours work? As in the flow of funds...Do you put all the expenses for one rental property back into its own line? Or are you using your line against your primary and using that to purchase new rentals? Or something I haven't thought of?

Eric Telese · Answer

@Axel Meierhoefer I have been wanting to get under contract for months now. The seller has been set on cleaning it out and then getting it appraised before discussing price. Appraisal report should be coming in any day now. All attorneys I have spoken to say that we can not get under contract without having a set price. What do you mean by all in one loan? Construction/renovation loan? I will definitely take an intro with a lender. Shoot me a PM with the contact information. Appreciate it!

Axel Meierhoefer · Answer

@Eric Telese If I were you I would put the property under contract right away so it is not on any market and nobody else can buy it. You can put a generous earnest payment, maybe $5K to demonstrate you are serious.For lending I would suggest you get an "All in ONe " loan. You don't have to pay any principle for 10 years, so you retain the option to refi after reno or just have a new appraisal and get the loan amount limit increased.If you like, I can make an intro and you can discuss the details with the lender.

Jerry Padilla · Answer

@Eric TeleseAre you planning to occupy the property? If not you will have to get investor financing - more than just 5% down. Is the property in livable condition to qualify for traditional financing? If so I would purchase with conventional 20% down to avoid paying mortgage insurance and use your cash for the renovations. At 6 months you can cash out refinance at get your money back out. I wouldn’t stretch your money too thin and purchase without having the money to renovate. A HELOC is difficult to find on an investment property.