Seller Financing, Down Payment, HELOC Etc.

Kevin Stein · 2015-03-13T09:12:34-07:00

Hello BP,Similar questions have been asked many times but I was hoping to get some advice on my particular situation.I own my personal home and a duplex that I rent. The duplex has ~55k in equity. My initial thinking was that I wanted to use the equity in the duplex to fund the down payment on my next rental property. However, I just found out that my lender will not do a HELOC against an investment property. So now I'm left struggling to find money for a down payment.My lender is requiring 25% down, which for me means I'd need about 25k for a down payment. I have about 10k in reserves from my current rental but want to keep that in place for unforeseen expenses, etc. And even if I did use some of that money I still don't have enough for the down payment.I am not interested in a HELOC on my personal house (well, my wife is not interested in it) so that's not an option.I just found one duplex where the owner would offer 50% seller financing on the property. So now I would only need $12,500 down, but again, I don't want to raid my rental reserves.I'm wondering if I need to speak with other lenders. Do some lenders lend against the equity in investment properties (not just primary residence)? Do any lenders lend without a down payment when the LTV is less than 75%? In this case I would only be borrowing 40% of value of the property because the rest would be funded by the seller.I do also have 35K in a rolled over IRA account from a previous employer. No longer contributing to that account, it's just sitting there so moving that to a self-directed account could also be a possibility but to be honest it scares me. Seems like a lot of moving parts.Sorry for the long post. I wanted to outline my situation to see if the brilliant minds at BP have wisdom for me! Thanks in advance :-)

Daniel DietzPro Member

Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes

11y

Kevin,

I am only one rental in, so have no advice yet about HELOC on rentals but I am sure others will chime in on that.

I DO have experience with SDIRA (I think you can search my past posts on here) and personally think it is a GREAT way to go. Like you, I had more liquid assets in my IRAs than as 'cash', so it really made sense. There ARE a lot of rules to follow, but it is pretty easy to learn too. Basically no 'self dealing' (no benefit between you and your SDIRA) and no benefiting a 'direct lineal descendant' - meaning can rent, buy from, sell to etc.. and parent, kid, etc....

I used UDirect IRA Services out of California as the Custodian and Mark Kohler Law Office (google him on youtube) for the legal work. Pretty simple IF you follow the laws.

Dan Dietz

[email protected]608-524-4899

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Kevin Stein

OP

Real Estate Agent · Oshkosh, WI · Member since 2014 · 29 posts · 7 votes

11y

Thanks @Daniel Dietz.

Quick follow up on the SDRIA. If I purchase a rental in that self directed account, does all rental income need to go straight back into the SDIRA? Am I ever able to "use" that money personally or does it follow the same early withdrawal rules as any other retirement account?

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Brian EastmanPro Member

Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes

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@Kevin Moen

SDIRA accounts are subject to the exact same distribution rules as any other IRA. This is retirement savings and has tax preferred status to help you build up a bigger nest egg once you reach retirement age. The trade off is that the funds are essentially off-limits until such time as you retire.

A SDIRA is simply a means of investing differently and having the choice to diversify out of stocks and into something you know such as real estate.

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Daniel DietzPro Member

Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes

11y

Brian summed it up pretty well there. Think of it exactly the same as a regular IRA... you CAN access it, but the same big penalties and taxes would be due.

Just wondering, do you see that as any different than a traditional or ROTH IRA? Or is it that your goal was to create 'current income' through your real estate purchases?

Dan Dietz

[email protected]608-524-4899

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Doreen Chaisson

Professional · Portsmouth, NH · Member since 2014 · 175 posts · 108 votes

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Hi - a few additional issues to consider:

1. If you use your IRA as a down payment and finance the rest, you will need a non-recourse loan. Not all lenders do them, and those that do typically require 35 - 40% down. They are typically 3 - 5 year ARMs, and they have certain property types they will not lend on (mobile homes, raw land, etc). You generally have to demonstrate that the property generates sufficient NOI to cover the mortgage payments; some also require an additional reserve of funds in the IRA in the event tenants move out, etc. If you pursue seller financing, that person's note will also have to be written as a non-recourse loan, meaning the only recourse in the event of a default is that piece of property. They can't go after any other IRA or personal assets to satisfy the debt.

2. The mortgage payments must be paid with IRA funds and not your personal funds.

3. All income generated must flow back to the IRA. Having any proceeds from the property go to you would be construed as a distribution, subjected to taxes, and if you're younger than 59 1/2, you'll also pay an early distribution penalty.

4. When you use leverage to purchase an IRA asset, your IRA is subject to a tax called UBIT- Unrelated Business Income Tax - on the portion of the rent attributable to the leverage. For example, if you put down 40% and finance 60%, roughly 60% of the net income generated would be subject to UBIT tax, which must be paid by the IRA. You'll need a CPA to calculate the potential impact this may have.

I hope this helps clear things up!

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Kevin Stein

OP

Real Estate Agent · Oshkosh, WI · Member since 2014 · 29 posts · 7 votes

11y

Thank you very much @Doreen Chaisson, @Daniel Dietz, @Brian Eastman.

I definitely need to do more homework on the SDIRA, but I can do that on my own time and come back with specific questions on that front :-)

Anyone have any suggestions/insights regarding traditional lending, HELOC, etc. in the situation I described above? Thanks again!

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Darren Budahn

Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes

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@Kevin Moen

There are lenders who will give you a HELOC on an investment property. From what I have read, they are difficult to find, but they do exist.

The LTV will be lower than a HELOC on a primary as well (60% to 65%).

I know certain lenders advertise right here on BP in the Marketplace, who will give you a HELOC on a rental. Otherwise, try some smaller local banks or credit unions in your area and see what they say. You will probably want to speak with someone who works in commercial lending department. Good luck

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Seller Financing, Down Payment, HELOC Etc.

Seller Financing, Down Payment, HELOC Etc.

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