Finance 101: How do I buy this?

Question

Hey all,

I'm looking for some how-to on financing.

I'm part owner of a vacation rental in New Hampshire with a group of family (we comprise 3 families altogether). We're coming up on 5 years of ownership and the business plan all along has been to sell after 5 years.

Meanwhile, I've decided to pursue vacation rentals on my own as an avenue to buy-and-hold, so I'm looking to add this investment niche to my portfolio.

Which means: I'm considering buying our current vacation rental from the other 2 families and owning it myself, assuming the numbers work (I need to do some additional analysis, as we used a HELOC from my parents and made interest-only payments for the mortgage; the remainder of the cash to furnish and make repairs came from $$ we each threw into the pot at the beginning). We've always run it like a business, and I have the records to prove it. It's always been a rental first.

My question is: what options are available to me for purchase? Everyone else wants to cash out, so owner financing really isn't on the table. So what do I do? Do I go to a bank and talk to them about a refi? Is it a commercial loan? Or maybe some other scenario? Can I purchase this in the same way someone might purchase a multi-family, so long as I demonstrate that it is indeed a rental property? How closely will they look at my personal credit and income (I'm self-employed), especially if I bring them a solid business plan?

Thanks in advance for any help!

Bill Gulley · Answer

I'd approach a bank with a purchase contract of the other parties undivided interests (1/3). This would be viewed as a purchase without a down payment required as you are already in title with an equity amount, the loan is underwritten as a purchased but closed as a refinance. Your income will be off your tax returns and credit.

Next way, your sellers can refi cash to buy either on of you out with all signing the note who remains on title. You could then repurchase as a sub-2.

You could make a larger seller financed note to overcome the discount and sell the note, that would "dip" into your equity.

Sell to an investor and repurchase as an investment with seller financing.

Find a private lender for any of the above instead of a bank. Think along the lines of refinancing then assumption of their undivided interests. :)

Karin Crompton · Answer

Thanks again, Bill Gulley

The ownership is not quite as convoluted as I probably made it sound. Property is owned by a Land Trust, with the beneficiary being just one LLC that includes all involved family members. So the only issue I was concerned with on that was being able to show that I am indeed on title ... though perhaps the Trustee would sign and all would be kosher that way.

The last option, selling the note, might be doable in this scenario. I need to send it to the business partners who are much better at math than I am. :)

To pay off the existing loan (145k), plus repay the up-front cash of the other 2 families (18k total) = about 163k. (I should note that everyone is hoping to at least break even and harbor no grand visions of big profit.) The house is worth about 190-200k retail (a couple of Realtors have given us higher comps, but I always play it conservative). As far as my personal purchase price, I'm thinking I could purchase for less b/c there would be zero commission under that scenario and we might even be able to transfer it to me w/o paying conveyance tax. That would lop about 10-12k off the top. Additionally, if I'm not cashing out my own 9k that I put into the pot at the beginning, it could be reduced again (now looking at a purchase price of 170-175k) ... unless it makes sense to wrap my own initial investment into the resale/refi so as to "cash out" my 9k and use that freed-up cash elsewhere. So the bottom line, if I'm figuring everything properly, is that the other 2 families could be paid the same amount they would on a traditional sale, even if they sold it to me at a lower purchase price.

Anyway, that's me thinking out loud.

Thank you again! Your input is always of great help.

Bill Gulley · Answer

You're on the right track, good luck. :)

Bill Gulley · Answer

If you have convoluted ownership with a trust and LLCs between 3 parties and they have similar entities involved you need to see you attorney.

Could have gone with conventional financing but not now with the way it's structured.

You may have to covey your interests to them and then repurchase to have them finance it and then with a loan in place buy it sub-to.

My suggestion of private money is not with a hard money lender, private money is from an individual friend, perhaps relative.

I don't know how much equity there is or the value of the place so there is no way to see what a price could be or how they can get cash from a refinance.

This deal can be underwritten as a purchase at 80% to fund, your equity % is your down payment if you are buying, it will be closed as a refi.

If the value is 100K you might have a seller financed note at 80% (basically giving 10% of your equity away), then sell the note at 66/67% to get cash to them, your higher note value includes the discount taken by the note buyer. 66/67K cashes the partner out at what their interest is. :)

Karin Crompton · Answer

Thanks @Bill Gulley  - that's exactly why I come to BP, because I know someone will come up with ideas I've never thought of (and sometimes don't understand!). My brain always stretches.

Ok, I hope you don't mind me asking some follow-up questions on those scenarios:

Purchase contract of the other parties' undivided interest ... we own the property in a Land Trust, so any thoughts on how I might demonstrate that I'm on title? (Mom is currently Trustee and I believe our LLC is beneficiary, but the beneficiary is not disclosed.)

Can you expound on Option 2? I didn't exactly follow. The sellers - i.e. the other 2 families - would refi first, and then I repurchase as a sub-2? Also, under this scenario, how do the sellers see a profit? My thinking is that I would probably purchase for about 30k more than is currently owed. (You might have answered this question in Option 3 - the seller financed note, then sell the note.)

I did think of #5, finding a private lender. But I wondered whether it's cheaper to refi with a bank? Thought I'd explore some "traditional" options first, considering that I'd probably refi down the line if I started w/a private lender anyway, right? Maybe I'm mistaken on that assumption.

Thank you again! Awesome stuff.

Finance 101: How do I buy this?

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