Oregon property, refinance or other option?

Question

Hi everyone! Hopefully an easy question here but first some backstory:

My mom inherited her parents house, completely paid off and just appraised for almost $500K. She and her brother share it, he wants out, and my mom wants to keep it.

I told her that maybe she could take a cash out refi to buy his half and everyone is happy. She’s worried about the mortgage outstripping what they are renting it for which is $1950. I thought if she gets 70% she would be able to give him his money and have almost $100k (which I think she should use for more properties but she is uncomfortable with) for any unexpected repairs or if there is a difference of a few hundred in the mortgage to rent.

Is this the best way to go about it? And if so what avenues would you look into for the best rate?

Thanks!

Casey

Taylor Rhodes · Answer

Hey Casey, I think what you outlined is a good option.Does your mom want to keep it out of sentimentality, or is she truly trying to use this home as an investment vehicle?If she is using this property as an investment vehicle - selling could be a more desirable option as she could put the money to work in a slightly better investment property (for return purposes) while at the same time, getting her brother out.

Brandon Harris · Answer

For rates, I have had a lot of luck with credit unions. They seem to have really good rates, even for investment properties. OnPoint Community Credit Union is one of my favorite.When it comes to getting cash out of the property, before she does anything she should make a goal for what she would do with any extra cash. There is no point in it sitting in her account while she pays interest on it and inflation eats it away.Your plan to refi is doable. What she/you need to do is run the numbers on different refi options to see how it will work as a rental. $1,950 is likely a low rent for that house in the Portland area.If she is interested in selling, she should remember to factor in all the costs related to that. 5%-6% realtor commission will knock the proceeds down to $470-$475k, plus other selling costs. Depending on when she inherited it there could also be some taxes on the sale. I would talk to a CPA about that. If her brother is interested, he could carry the loan instead of her refinancing. Or she could refinance to get a sizable sum out for him as a down payment and then write a note to him for the rest. There are a lot of options. I think it centers mostly around her investment goals. Maybe you offer to manage it all for her for a fee if she doesn't want to be involved. Win-win!

Timothy Hero · Answer

She may need to go with a DSCR/non-qm lender, and they base their loan amounts on cash flow. A $500k property renting for under $2k won't be getting more than 65% LTV if I had to guess.

Robert E Thompson · Answer

Casey,There are any number of variations here (as there always are, of course) and of course I don't know most of the numbers or what your mom's goals are, but...70% LTV is almost certianly going to put her at negative cash flow once taxes and insurance are added in. And that's with no additional expenses in maintaining the rental and not accounting for vacancies, etc. 50% may put her in the same position (negative cash flow) - I don't know her expenses of course. If she does the 70% LTV and sets aside the 100K, she'll end up with negative cash flow and will be using her own equity just to keep the whole thing going. Basically at that point, with negative cash flow, you're speculating on the property itself... that the money is going to come somehow in the future when values increase or that rents are going to increase enough eventually to go from negative to positive cash flow and that the future income will make up for all of this outflow now. I don't see (again, without the whole picture in front of me) this as a super great scenario, particularly if she's just looking to have a cash-flowing rental.I'd be happy to answer things more specifically with more information and have some very good mortgage people you could run numbers by.

Casey Oberg · Answer

It’s a bit of both I suppose, my grandparents built that house brand new to their unique specifications. So she loves that. But she also enjoys currently getting rent for it, as well as having it as an option to move to down the road. But I do think she wouldn’t mind parting ways with it for the right numbers. I just don’t think she would invest with the money, she might by a primary residence as they currently rent but that would be about it.

Travis Timmons · Answer

I can't help much with your direct question but do have a good lending contact in Portland that I have worked with in the past. Send me a direct message if you would like me to pass his contact info along.