Too soon for another?

Question

Hi BP,

I am a fairly new investor, I only do this part-time at the moment but I manage and do all of my own work. My goal is to go full-time someday, but for now I am just trying to build my portfolio while I still have a full time job.

So, I just closed on a 4 unit property in December that was fully rented and cash flowing. Purchase price $148,000, ARV $170,000. It needed a couple updates and will need some other minor work done in the future, but for the most part the only work needed is if something breaks! This was purchased under an LLC and was funded from private money (down payment $29,600) and a commercial loan (Mortgage $118,400).

I just found a great 3-unit property that is foreclosed in another good area close by. This one is vacant. It is listed for $70,000 and just needs paint, carpet and a cleaning. (No for real, that's all it needs). I'm estimating at the most, $10,000 in repairs and updates. I am hoping to close at around $65,000 and use an FHA Rehab loan so I only need to put 3.5% down and my repairs/updates can be rolled into the mortgage. The property will gross $1,700 once it is rented and I estimate that it will have an ARV of around $120,000.

I will not have the cash for a 20% downpayment if the FHA financing doesn't work out. If it doesn't I will need to find another private lender to fund the 20% down. I know this is a great deal, but am I jumping too soon after I just bought the 4-unit 3 months ago? I will have about $6,000 cash in reserves in the LLC to cover the mortgage if need be until I get it rented, but is this okay to use this money since this new property won't be under the LLC? (FHA cannot be used for LLC financing). And If I were able to close on this, would you recommend a cashout refi to get away from the FHA and avoid the PMI?

Thanks for any advise you can give!

Bryan L. · Answer

My advice would be to not get in too much of a hurry. Give yourself a little time to see how your first purchase is REALLY performing. Multi-families can eat your behind if you make a mistake. Ask me how I know.

Doreen Chaisson · Answer

If you involve your IRA money in the investment, your IRA becomes a co-owner of the property. This triggers a number of factors to consider: you, your spouse, and any of your ascending or descending family members (and descending family member's spouses) cannot make any personal use of the property and are also prohibited from doing any repairs and maintenance on the property. Painting, repairs, lawn mowing, lightbulb changing all will have to be done by an unrelated 3rd party. Most IRA custodians will make you hire an outside property management to handle these items, as well as paying the bills. All expenses are split proportional to ownership, as well as all income generated. Furthermore if you combine your own personal and IRA funds for this purchase, you will be unable to get a loan to finance the balance of the purchase as it's illegal to use an IRA asset to collateralize a personal loan. However, if you have enough funds in your IRA for a 30% or more downpayment, plus some cash reserve, your IRA could purchase the property directly, without involvement of your personal funds at all, by securing a non-recourse loan if additional funds are needed. There are a number of non-recourse lenders that are willing to lend directly to IRAs, provided their qualifications are met. The property must be income producing and some will not lend on certain property types like raw land or mobile homes; others require higher down payments, and so on. The IRA itself is the borrower and the IRA must make the monthly mortgage payments. Be advised that purchasing real estate with leverage in an IRA kicks off a tax called UBIT - Unrelated Business Income Tax - on the leveraged portion of the income. For example, if you finance 40% of the purchase, roughly 40% of your IRA's net rental income after exemptions will be subject to this tax. A good accountant or CPA can explain how this works - it's a pretty complex calculation but one you need to weigh when considering your options. If you need to finance only a small portion of the IRA's property purchase, UBIT may be negligable.

Jack Bobeck · Answer

Good, take your time, go find private money while you look for the next. Never use your own money in real estate. No need!

Justen Ashcraft · Answer

To get an fha 3.5% down loan you would have to owner occupy.

Andrew Feil · Answer

Thank you for the advise guys! Turns out there were already multiple offers on the place so to be competitive we would have had to go conventional which would've required 25% down. I don't have the cash at the moment for that so I guess I will have to wait for the next one!

Mike D. · Answer

Do you plan on moving into the triplex?

Kerry Baird · Answer

I don't see why not...I would give it a go if it were me. Perhaps the first step would be talking to a FHA approved lender to see if you can qualify for their rehab loan. Make your offer contingent upon loan approval. Do you have an IRA? My last lender counted IRA funds towards cash reserves. You'd have some strong motivation to get tenants in ASAP.

Jordan Thibodeau · Answer

Congrats on the first purchase. Are you confident you can find 3 quality tenants for your new property while working full time? Also, do you have any vacation time that you could use in case you needed to spend time at the property? As far as cash out refi, you uusually have to wait 6 months before doing so.