Cash Out Refi for Killer Deal

[Scot M.]

The Short: Looking at a cash out refi on two single family rental properties to use as a down payment on a commercial property.

The Long: My father passed away two years ago leaving my 80 year old mother with about 112K in debt. He also left her with a commercial property worth around $1M that she has no interest in. Rent from this property brings in around 2K/month. The lease is up for this tenant. Mom is not in a position to have this property sit vacant waiting for a new tenant or buyer and not have the income. I have a brother who has no income and lives off my mother's social security (another tirade for another day). I have made a proposal to my mother to purchase her commercial property.

The Seller-Financed Deal:
Downpayment of $112K (this will pay off all her debts and give her a couple thousand to have in the bank)
Monthly payment of $1500 (this plus her Social Security income is enough to cover her monthly bills)
Purchase price of $500K (balance due when I sell, when 10 years is up, or when my Mom passes...whichever comes first)

My Question: I have been researching using my rental properties for a home equity loan or for a cash out refinance for the purpose of pulling together this down payment. I am finding all sorts of information online regarding these products. Not all of this information aligns. I have a great bank I have worked with in the past. Before I go to them, I want to have an idea of what my options are. My two rental properties are valued around $270K with outstanding balances of $130K. Am I able to tap into all $140K remaining or only a portion? Is a cash out refi the best option to come up with $112K for the down payment?

My plan is to either 1) sell the property as quickly as possible (probably 1-2 years), 2) get a tenant in (probably 3-6 months), 3) build on the property to maximize monthly income (currently used as a used car lot, perhaps build a strip mall in its place...amazing location).

I seek all advice on every aspect of this proposal. Thank you!

[Stephanie P.]

@Scot M.

Hey Scot,

Sorry to hear about your Dad.

You should probably talk to a good estate planner in South Carolina for your Mom.  That will help you with the transfer of assets and the best way to do it.  What I've seen in the past, and what my husband's family has done for generations, is this; as parents get older, add the children to title with the appropriate legal safeguards so the parents can stay in the property if they wish, so they property doesn't get encumbered in the event there's a need for long term care etc...  That makes for an easy, probate free transfer of assets, but like I said, get a good estate planner to help you with that.

You should be able to do a cash out refinances on the rentals and if you qualify using conventional financing, do that to the maximum (generally 75% for cash out through Fannie Mae).  If your bank won't help you, go to a good mortgage company in your area.  If you don't qualify conventionally, then there are various commercial no income verification products available for single family rentals.  The rate is a little higher, but the qualification is easier.  Providing your Mom with a monthly income through a seller held mortgage is a great way to go.  

Hope that helps.  Not sure I told you anything you didn't already know though.:)

Stephanie