Need Creative Ideas

[Haven M.]

So, here's the story. I am a new investor, been studying for awhile, but been doing some globetrotting and haven't been settled in one place long enough to feel comfortable with my knowledge of the local market in order to take the plunge. I'm ready now.

Problem: No money. Yeah, you've heard it before. But here's a twist. I have talked with my stepfather about investing in real estate on a number of occasions, and he's intrigued by the idea, but too gun shy to really pull the trigger.

He bought, and owns outright, the house next to where he and my mom live and rents it out. The house I would guess the value of the house to be in the $275k-300K range.

Here's where I need some creative ideas. I want to figure out a win-win way to buy the house from my stepfather, remember I have no money, so that I can use the equity in that house and leverage it to buy other investment properties.

I don't want to ask my stepfather for an outright loan, so that's not an option, and I want to get the home in my name. It's a great rental property and I don't want my stepfather selling it to someone else on a whim without telling me.

What are some ideas for putting together a deal that will be attractive to my stepfather and get the house in my name so that I can leverage it to get started on my investment career?

[Jon Holdman]

To be a "great rental property", a house worth $300K would need rents of something like $5000 a month. Does it get that? Possible, I suppose, but doubtful.

The only way to have equity in the house is to buy it for less than its worth. Even then its tricky because the sales price can set the future value. So, to make this work, you would need to coax your stepdad into selling it to you for less than its worth. That's essentially a gift. Is he willing to do that? Then, in order to extract some equity, you need to get it below whatever LTV the lender will allow. For investment properties, that's quite low, maybe 80% at the most. And you will need to hold it for a while before the bank will use a new appraisal.

So, it might look like this. If it is SOLIDLY worth $300K, considering the low end comps (not the best ones, an appraiser won't choose those), then you need to buy it for, say $200K. Now a year from now you refinance, assuming a bank with do 80% (and you qualify), you can borrow $240K. Assume you will spend about $5000 in costs to do the refi. That would net you $35K after paying off your stepdad. Is that worth it? Can you qualify (without the rental income, you would need to wait two years to count that)? Will your stepdad sell it to you for two thirds of the market value?