Paying almost 50% to close is normal?

Question

Me again seeking the outside perspectives of those of you who aren't new to this RE investing/flipping venture as I am. So I was told about a simple cosmetic fixer that's off market asking $70k. This sounded like a perfect intro into the realm of fix & flip until I was told that I'd need $30k to close plus six months of reserves to cover HM loan payments. So I'm looking at like $35k out of pocket before any work starts on the property. I'm using monies from my Roth & tradit IRA but they only allow up to $10k withdrawn early for home purchasing. I guess I'm not opposed to totally closing out my IRA's so I can have access to all my money, but I'm trying to understand why I have to pay so much to close. What happened to 20% + reserves which would be way less than $30k?

Admittedly, I'm new to this and somewhat skeptical but clearly I want to get into this area of RE investing, I just don't want to be taken advantage of and I don't want to spend every last dollar just to close.

Thanks again for your experienced perspectives on this.

Steven Harris · Answer

@Ned Carey Thanks Ned. I have a SDIRA. I've considered the loss of financial growth of my investments by using some of those funds for fix & flips. My goal is to be able to continue contributing to my IRA's after each successful sale. And if by chance I haven't secured a deal on a fix and a HML that fits my financial state inside the next 60 days I absolutely will put those monies back into my IRA's and avoid the taxes and penalties of early withdrawing. BiggerPockets & @Brandon Turner offer ways to get into this with no money down or very little. That's what I'm reading up on. Hopefully I'll get feedback from those who started out similar to how I'm starting out; with limited savings, excellent credit and no steady income I'm also avoiding asking family or friends for chunks of money, so that route is not an option for me.I know this can be done without having $90k of my own cash on hand. But I'm working with excellent credit and a decent chunk of change which from what I've read so far is enough to get start out with a simple cosmetic fix & flip.My research (and reading Bigger Pockets, Investopedia & RE investing books) continues....Thanks again sir.

Ned Carey · Answer

@Steven Harris taking money out of my IRAs even penalty free Roth money was one of my worst financial decisions. Remember the value of compound growth. You are a pretty young guy. Taking tens of thousands out now may cost you hundreds of thousands later. One thing you can do is set up a "Self Directed" IRA. This type of IRA can invest in real estate. The money goes back into the IRA, so it doesn't help your day to day finances but it can supercharge your retirement funds.

Jay Hinrichs · Answer

100% agree with this.also I like to mention that if you go to lendinghome.com they have a very transparent ( at least they used to) funding pricing matrix.. that took into account experience credit and such.. gives you kind of a guide line to what is out there in the way of pricing and equity required and experience..

Caroline Gerardo · Answer

First time buying from a wholesaler without job income getting a hard money loan is what I would factor as a 100 on a 1 -100 scale of risk. This is why the hard money guy wants lots of equity. Get out your yellow pad: purchase cost, cost you think to repair X 3, carry cost, time it will take to have a wonderful tenant... Do you have 16 months reserves to make payments and finish when: the roof caves after a tornado, the tenants refuse to pay and sue you because of mold, or some uninsured event occurs.

Peter Mckernan · Answer

@Steven Harris first thing, I would check in on your liability on the Roth money coming out and the penalties/taxes you will get hit with and if it is worth it to do so. Sometimes these are 30%-40% of what you have in the retirement account. Second, there are a lot of Hard Money lenders out there that can give you so many different breakdowns on fees, amount to put down, reserves in the account(s), and other items on top of these requirements. This all depends on the company and the requirements. If this one is not going to cut it for you I would look else where.I have used HM companies that charge 20%, give the rehab costs, and do not ask for 6 months reserves.

Steven Harris · Answer

@Jlh, Lendinghome doesn't lend to first-timer buyers & flippers.I was very ready to go with them until I found that out.

Steven Harris · Answer

@Caroline Gerardo, the HM lender didn't ask about current income actually,,only funds on hand/in accounts....My objective with my first project is a quick, cosmetic, uncomplicated fix & sell as I said the $70k off market place would be.

Steven Harris · Answer

@Caroline Gerardo, Hey so I just learned how to borrow money rather than deduct it from my IRA. The money I'd deduct can be considered as borrowed as long as I redeposit it inside of the 60 window. I actually used this process in the past when I left one employer, took the money from that 401k as a pay out but ultimately redeposited it in a new IRA inside of 60 days. I guess I never looked at it as "borrowed" money because I intended to put it back into another retirement account. This could work out perfectly if I can close, flip & sell the place in under 60 days. But so much rides on being able to close and connecting with a great GC & crew to get it done in short order. The $70k cosmetic fix sounds great but again, I'm really put off by having to pay just shy of 50% of the cost of the place just to close.Thanks for bringing the borrow option to my attention Caroline.

Steven Harris · Answer

@Caroline Gerardo Thanks for your reply! I'm surprised I didn't come across information on borrowing against my IRA's. Maybe I can borrow more than the $10k limit set on early withdrawing? The off-market property I'm referencing is a single family house, not a multifamily, though I am open to those but ones that are tenant occupied that I can buy & hold for a few years. At this point I don't have an income source but I am still on the job hunt. I'm trying to make the most of my excellent credit, savings and use as "smartly" as possible my retirement funds. Maybe I should look for a different RE wholesaler & HM lender?Thanks for lending your expertise in my "due diligence"!

Steven Harris · Answer

@Peter Mckernan Thanks for your reply. I am looking at penalties & state taxes for touching my traditional IRA well before 59 1/2 and I've directed them to take out federal taxes. Roth is clean & clear as I've paid taxes on that money before putting it into a ROTH and I'm only touching monies that I've contributed, not any of the earnings from investments. If I "smell a rat" I will definitely look for a different RE wholesaler & HM lender. I'm just trying to make sure I'm not letting my lack of experience cause me to doubt the validity of "the process". Your reply makes lot of sense. They very well could give me so many different breakdowns to justify why I need to pay 50% upfront. I don't want to consider this company illegit just yet and so this forum and people like you help me do my "due diligence" so again, major thanks!!! Shout out to @Brandon Turner for mentioning this site in Rental Property Investing!