HELP! How can I afford $85k for $60k?

Question

Here's the situation: I am looking to purchase my first investment property in Denver, CO and I intend to split the upstairs and downstairs with secured entries to both for rental units - upstairs 2 BR/1 BA, downstairs 1 BR/1 BA.

I have about $60k (stocks, savings) in liquid assets and another $65k tied up in retirement accounts. Because this is considered an investment property, the mortgage company wants 20% down on the $400k property which would come to $85k or so with closing costs. We were hoping to bridge that -$25k gap by using an unsecured loan or through a gift from family members. However, we're  being told that neither sources of income are acceptable for an investment property. I was told that I could liquidate a portion of my retirement accounts and then reimburse with a family gift and if it's within 60 days we wouldn't pay a penalty, but that seems a bit sketchy.

A caveat: our tenant in the 1 BR would be my sister (in-law), so that may add an element of ways to get creative with financing.

I have a stable job/good credit and my preference would be not to get our sister on the contract, but she also has great credit so will if it's absolutely necessary. Sorry to be so wordy, but thoughts?

Could we do the deal as a primary residence and then take over her portion of the ownership in years ahead since she would not be putting up any capital? What sort of tax implications/shelters would I be missing out on as a result of having her on the loan?

Thank you BP!!

Bill S. · Answer

@Christopher Fink another moving part not mentioned is the fact that this is a long distance deal. Find something in your local market.

There are ways to get at the funds. You need a plan and then you need to execute the plan. Get the funds from where ever you are going to get them. Get them into your account. Once they are there for 60 days most lenders I know will accept them. Obviously it won't work for this deal but if you plan and your target is a $400k property then it's doable. More realistically is just to accept a lower price point that you can afford with funds on hand.

$400K is a pretty steep price for a duplex that's a 2/1 and a 1/1 even in the Denver market. Keep shopping.

Travis Sperr · Answer

Two suggestions - Don't put her in the deal and don't rent to family.

Wait for a deal you can handle, especially your first - too many moving pieces in this one.

Dan Mackin · Answer

@Christopher Fink

Out of curiosity, did this deal come up because your sister in law is looking for a place herself and you figured it might be a good way to start investing?

Trevor Western · Answer

I couldn't agree more.  If a family member is renting from you it affects the business deductions permitted by the IRS.  Don't get emotionally tied to this deal.  A better one will come along.

Alex Chin · Answer

In my opinion, there is so much involved with this deal that I would walk-away and see if you can act as adviser to your sister-in-law. See if she wants to jump into the REI arena with her first house-hack.

Then you can monitor this property, see if your analysis of the deal was correct and gain knowledge that will benefit you greatly down the road.

Ryan Robirds · Answer

Yeah that sounds like a stretch.  You could always take an early distribution from your retirement and pay the 10% penalty if the deal is worth it, but how long would it take you to recover the $2.5k penalty?  Also, what kind of rent do you expect?  I don't know what area of Denver this is in but getting $4k+ in rents for a 2/1 and a 1/1 seems high.

Jamar Taylor · Answer

The problem is that you have to jump through too many loops for a mortgage. Mortgages aren't for investors. They're for everyday 9-5 working people who just want a home to live in. Aside from the fact that once you fulfill that mortgage, you end up paying for that house 3 times. Getting a mortgage as part of a long term strategy to hold a property isn't smart. You lose too much money. There are specialized loan companies that have been establish just for investors. The company I work with gives me all types of options like a 3 day loan for 1% overall interest, 90 day fix and flips for 3% a month, and 3 year buy/hold for 1% a month. No credit checks, no approval process, no loops to jump through. Just all business. This eliminates your search for money.

Dan Mackin · Answer

@Christopher Fink

I would shop around more on that loan. With some lenders they just want to know where the money came from, but won't say no just because it's a gift. Going with your sister in law on the loan can possibly make things tedious, but it's up to you on how complicated you want to get with this. She would also need to be able to qualify for the loan. I can give you a good mortgage broker's info if you want to run these questions by him. He's here in CO.

HELP! How can I afford $85k for $60k?

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