Buying a 2 family rental property using home equity.
New Brunswick, NJ · Member since 2017 · 7 posts · 3 votes
I have a home worth $350k that's completely paid off. A neighbor is selling their two family which has two 1,100 sq ft apts (1 br). Upside, backyard, deck, access to mass transit, restaurants, beach. Downside, needs new porch, flight of stairs to get to the porch, and needs new electrical (still uses knob and tube). Selling for 299k. What kind of strategy would you employ here hypothetically? I'm totally new to this but interested in learning. I've read the no to low money down book. But I'd love to hear from people "in the game".
@Seth Nanton you could do a lot of things. Depending on how well you know your neighbor, you could work out an owner financing arrangement, or negotiate credits for the work that needs done with them. Since your home is completely paid off, you could do a cash out refinance on it, and put money down on purchase of new home, or take a HELOC out against your home to do the same. Depends on what your goals are..... Don't have numbers so don't know if this is a good deal or not, but those are some of the options you could use to purchase the property. Good luck!
@Seth Nanton you could do a lot of things. Depending on how well you know your neighbor, you could work out an owner financing arrangement, or negotiate credits for the work that needs done with them. Since your home is completely paid off, you could do a cash out refinance on it, and put money down on purchase of new home, or take a HELOC out against your home to do the same. Depends on what your goals are..... Don't have numbers so don't know if this is a good deal or not, but those are some of the options you could use to purchase the property. Good luck!
The first thing to do is to determine what the rents are for the units. Then using the numbers you fill out the Bigger Pockets rental calculator to determine if this is even a good deal. Just because you can buy it doesn't mean you should. Good luck. I hope the numbers work out for you.
I am fairly new as well but I agree with @Anthony Hurlburt. Step one is to run the numbers.
1) what would property be worth post rehab
2) how much would the rehab cost
3) what would the units rent for
4) what would be you ongoing costs
5) will the cash flow cover the cost of financing the down payment and rehab costs
If the numbers make sense, then you figure out how to finance the deal.
Scenario:
Let's assume you need to go to a bank to get financing on the property and you need to access equity from your primary residence for the down payment and rehab costs.
$300k purchase price with 80% LTV mortgage
$65k for down payment and closing costs
$35k rehab budget
All in you need $100k in order to close and get the house rent ready based on the rehab budget. You decide to be conservative and pull $125k out of your primary residence in case the rehab goes over budget. When it is all said and done, you go a little over budget and the rehab costs $45k so you end up actually needing $110k in total.
HELOC vs Mortgage on primary residence:
Personally, in your situation I would get a HELOC instead of a mortgage against your primary residence. Although the rate on the HELOC may be slightly higher than on the mortgage, The reason I would use a HELOC is that with a mortgage you have a locked in payment and are paying interest on the amount of the mortgage no matter whether you use all of the money or not but with a HELOC you are only paying interest for the amount of the money you are using.
If you pulled the money out of your house using a mortgage, you would be locked in to a payment for the term of the loan on the entire $125k even though you only needed $110k. Also, the mortgage would be accruing interest and you would be responsible for the payment from the time you close on the mortgage.
Now if you use a HELOC instead, you would have only pulled out $110k of the $125k HELOC. You would only be responsible for interest and payments based on the $110k instead of the entire $125k. Also, the HELOC would not start accruing interest until you actually pulled the money out along the way throughout the project.
@Seth Nanton you could do a lot of things. Depending on how well you know your neighbor, you could work out an owner financing arrangement, or negotiate credits for the work that needs done with them. Since your home is completely paid off, you could do a cash out refinance on it, and put money down on purchase of new home, or take a HELOC out against your home to do the same. Depends on what your goals are..... Don't have numbers so don't know if this is a good deal or not, but those are some of the options you could use to purchase the property. Good luck!
Thanks Josh, great information. Owner financing arrangement has caught my attention especially.
I am fairly new as well but I agree with @Anthony Hurlburt. Step one is to run the numbers.
1) what would property be worth post rehab
2) how much would the rehab cost
3) what would the units rent for
4) what would be you ongoing costs
5) will the cash flow cover the cost of financing the down payment and rehab costs
If the numbers make sense, then you figure out how to finance the deal.
Scenario:
Let's assume you need to go to a bank to get financing on the property and you need to access equity from your primary residence for the down payment and rehab costs.
$300k purchase price with 80% LTV mortgage
$65k for down payment and closing costs
$35k rehab budget
All in you need $100k in order to close and get the house rent ready based on the rehab budget. You decide to be conservative and pull $125k out of your primary residence in case the rehab goes over budget. When it is all said and done, you go a little over budget and the rehab costs $45k so you end up actually needing $110k in total.
HELOC vs Mortgage on primary residence:
Personally, in your situation I would get a HELOC instead of a mortgage against your primary residence. Although the rate on the HELOC may be slightly higher than on the mortgage, The reason I would use a HELOC is that with a mortgage you have a locked in payment and are paying interest on the amount of the mortgage no matter whether you use all of the money or not but with a HELOC you are only paying interest for the amount of the money you are using.
If you pulled the money out of your house using a mortgage, you would be locked in to a payment for the term of the loan on the entire $125k even though you only needed $110k. Also, the mortgage would be accruing interest and you would be responsible for the payment from the time you close on the mortgage.
Now if you use a HELOC instead, you would have only pulled out $110k of the $125k HELOC. You would only be responsible for interest and payments based on the $110k instead of the entire $125k. Also, the HELOC would not start accruing interest until you actually pulled the money out along the way throughout the project.
A lot to consider Robert, thank you for your input this is great.
Update : The house is under contract ( not me). Numbers work out in favor of me if the deal falls through.