Refinancing raw land to ease the burden of down payment.

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Refinancing raw land to ease the burden of down payment.

Adam Wuertz
New to Real Estate · Anchorage AK · Member since 2020 · 4 posts · 1 vote

Hi everyone. I'm looking into building my first 4 plex as an owner/occupier. Land in Anchorage Alaska is a little on the expensive side and I'm finding that the land's cost is pushing me away from my approved FHA financing. I was also approved for more money than the FHA through a Fanny conventional loan with the higher down payment. The Fanny loan is pretty much off the table at the moment, except for the fact that my lender is saying that this following scenario is possible.

“if you were to purchase the land with the minimum cash output needed, then with the use of a quit claim, quit clam the deed to the builder so that they may build the building. Once the building is built then the loan for the existing land is refinanced to include the cost of the new building. When that loan is refinanced, they take into account the value of the raw land as principal or money down therefor greatly reducing the amount of cash needed at closing to complete a conventional loan with 20% down.”

That’s at least how I heard what was told to me. So other than the fact I may not have all the details or the correct order of things. Does this refinancing idea seem like a real thing? I realize there probably has to be a lot of trust between myself and the builder but that aside, has anyone used a deal like this to get around those large conventional down payments?

This is approximately how I see my deal, using this refinance method 

Land value at purchase 200k. Purchased with a Conventional loan, 20 years at 4.8% interest rate with 20% down. Cash out of pocket for the purchase approximately 25k. Resulting in relatively hearty monthly payments until the refinancing of the loan happens.

The 4 plex is built using the quitclaim to the builder for a final value of 800k. Then the existing land loan is refinanced to include the building’s cost at a total value of 1,000,000$. At this point it seems that the original land value is looked upon by the bank as existing money brought to the table, in this instance 200k or approximately 20% of the total refinance amount. If this is truly the case then money out of pocket at this point is ancillary costs to close the loan etc plus the original amount that was put down on the raw land.

Am I completely of base? Does any of this make sense?

Thank you for any input.

Adam

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  • Allen S.
    Investor · Anchorage, AK · Member since 2018 · 73 posts · 75 votes
    5y

    @Adam Wuertz The total value of your land isn’t your down payment, just the equity in your land ($25k in your example).  Also, it’s very unlikely that you’ll be able to quit claim the deed to a property that you have a note on.  That kinda defeats the purpose of the bank holding the land as collateral.  I know the quit-claim to your builder is a thing, but I don’t prefer it and neither does my builder.  We are currently building a house in the Valley and will hold the title to our land in our name the whole time.  The likely path to building what you want will involve a construction loan, but that’ll require 20%-25% of the total project.

    More importantly, I’m wondering where in Anchorage you’re planning to build a $1,000,000 4-plex and get your numbers to pencil out?  Will these be high end condos in bootlegger’s cove?  Everyone has a different tolerance for how they run their projections, but I suspect you might be underestimating some expenses or overestimating the rents you’ll realistically get.  I’m not anti construction at all, and it definitely makes sense sometimes, but in this town I think it’ll be hard to get a reasonable return out of a $1,000,000 4-plex.

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  • Adam Wuertz
    OP
    New to Real Estate · Anchorage AK · Member since 2020 · 4 posts · 1 vote
    5y

    Good morning Allen.

       From what I’ve seen of the rents on three bedroom, with 2 baths and a two car garage, I’m using 2200$ a month as a conservative estimate for my rents. Clearly the property and its location is a big factor and good lots in Anchorage are a key. I have a duplex that I live in half of, which is 2 bed, 1 1/2 bath, one car garage with a fenced in yard and is across the street from an elementary school. The rent on the other half of my duplex is 1850. Another rental we have is a 3x2 condo with a carport in the East Ridge Condo association and we are renting it for 1900. We’ve been told by a property management friend of ours that she gets 2200$ for the same 3x2 unit in the same association.

    I’ll admit the rents don’t make sense but we put high quality finishes and new appliances in the units we remodel and so far through our own social network, we’ve found renters who think there is value in our rentals. So that’s where my numbers are coming from. With that being said I’m a novice at this and that’s where these inquires come from. I’m trying to narrow the gap between my own conception and reality.

    My current plan is to buy and hold. Your right, the cash flow of a 1,000,000$ 4plex is small by most investment standards but if I can cover all expenses and get to move into a bigger home, get to live there rent free (or close to it), and increase my assets, then I think is a good investment on my part. 

    This brings me to whether or not the building can be built in Anchorage for 1M, and can I make the deal work. 

    Does this at all sound like in still on track or just chasing pie in the sky?


    Adam 




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  • Allen S.
    Investor · Anchorage, AK · Member since 2018 · 73 posts · 75 votes
    5y

    @Adam Wuertz Your revenue numbers sound reasonable for most of the town.  Now the question of if this is a “good” investment or not comes into play... 

    Starting with what you know:
    Income = $2200 x 4 = $8800/mo

    Now your guess at expenses?  I use 50% as a general rule of thumb.  A new property might be less on capex an mx, so maybe 45%, but I wouldn’t plan much lower.

    Vacancy: 5%+
    Management: 10% (+2.5% for leasing and other fees)
    Capex/Mx: 6%
    Taxes: 20%+
    Insurance: 5%-8%

    So your net income per month is now $4400, or $52,800 per year.  $52,800/$1,000,000 = 5.3% return.  Is that “good”?  It might be for you, might not be for others.

    Now you can look at adding leverage. If you use an FHA loan and put 3.5% down ($35,000) on a 30-year note at 3.5% your payment will be $4,333/mo... which leaves you $67 of cash flow.

    Obviously you can do things to lower your mx expenses and management expenses by doing it yourself, but what is your time worth?  And what happens if rents go down 5% even temporarily or you have a vacancy longer than expected?  What happens if you move or become disabled and are unable to continue to manage the asset?  If you’ve factored the above expenses in properly then the asset just keeps paying for itself (which is why we all love real estate in the first place)... if not then you’ve either bought yourself a side job (which might be what you’re after) or you’ll be in a position where you are now subsidizing your investment (which I am going to assume is the opposite of what you want).

    The decision to build new or buy existing really just feeds into the top line of this discussion on how much you’re willing to pay to get a certain stream of income.  There might be other factors at play, especially if you’re going to live in this building forever, and that’s fine too, but that’s no longer a strictly financial discussion.  I’m also going to assume that like most people here, you probably want to house hack for a short time and keep the asset long after you’ve built or bought your dream house somewhere else...

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