DEAL OF THE YEAR...now how do I get funding?

Question

As I am new to real estate investing I had always thought that house hacking a duplex would be my first deal and a great way to start my journey to financial freedom. However while building relations at the most recent Raleigh REIA meeting I had met a guy who says you never turn down a good deal. This being said a very good off market deal has just been brought to me, however I need private money to make it happen.

Now about the deal, it is a new construction home where the owners passed away before it could be finished. New everything, kitchen with appliances, ac, bathrooms, hot water etc. The asking price is $400,000, with about $25,000 needed to finish the lower level and some exterior site work. Judging by what comps are going for it the area, the ARV would be around $600,000.

My idea would be to buy and hold for short term. I would at least like to rent for a year or two so I can 1031 exchange it and get out of paying the 30% in taxes on the flip.

I am a 24 year old civil engineer who works in construction management for a large general contractor, so I have the construction experience and sweat equity to offer, however not a lot of funding or real estate experience. Financially speaking, what would be the best way to acquire funding for this?

My idea is if I want to buy and hold for a while, I would only need about $100,000 for 20% down and some extra for renovations/contingency so I don't completely run my savings down to zero. Repair it as quickly as possible then refinance to repay my lender. However I don't believe you can "gift" 100k, so would this involve forming a combined LLC that they put the money into then have a written buy out option with interest for me to pay them back once ready to refi? Is this even possible? Any better ideas?

Thank you all in advance!

Jay Hinrichs · Answer

@Chris Martin  so many of these BP posts are like Paul Harvey's  "rest of the story"  its like pulling teeth to get to the bottom of these deals.

this in my mind would be a quick flip or an owner occ... deal.  I know nothing of the area.. but in many areas of the country when you get north of 500k the buyers go south.. very thin at the top.

what is should sell for and what it does sell for can be 100k difference easy making this not so great or even a loser.

Chris Martin · Answer

Regarding "This being said a very good off market deal has just been brought to me, however I need private money to make it happen." Is this really the case? Only private money? It's new construction that is not complete (no CO) and apparently the owners hired a builder who has done, it sounds like, about 80% of the work. Did the owners die intestate? Is there a lien (e.g. construction loan) on the property? Mechanics liens? Lots of things could make this not so great... or not bad. Unless it's destined for the courthouse steps, you'll need to interface with the current owners (heirs or owner's estate). Two completely different paths financed in different ways.

Thomas S. · Answer

If you can not qualify for conventional lending on this property it is a bad deal and you should avoid it entirely. Your guy that says never turn down a good deal is assuming you have the finances in place to buy.

This property is not a investment, as much as you may think it is, it is in fact at this point the purchase of a personal home. ARV "around 600K" will likely end up losing you money.

Chris Mason · Answer

Ah, got it.

Secure that $100k loan by another property you own as a (2nd) mortgage, and you can use it for down payment on an investment property. Just like people use a HELOC for down payments.

John Leavelle · Answer

Howdy @Derrick Lubomski

Have you completed a Rental Market analysis?  What are the rates for that type of property?  You need to know what your potential cash flow will be.  Why are you worried about paying taxes?  They are just part of business.  Profit is profit!

I hope you understand to complete a 1031 exchange the new property must be worth more than the one you are selling.

The financing for your Buy and Hold idea needs more thorough analysis.  You say you don't have the 20% ($100K) down payment or the construction/contingency funds.  Therefore,  you will need to have help from a Private Money or Hard Money Lender.  Do you qualify for a conventional loan (other than the funds mentioned).  If not, the acquisition funds must also come from alternative sources.  @Brian G. is correct in recommending you check local banks and credit unions to get the financing.  If you can't get conventional financing, then, you will need Private or Hard Money for the whole deal.  The interest costs would end up being as much or more than the taxes you want to avoid on the flip.

Here's some hypotheticals:

Let's say you get Private Money to finance the $425,000.  You pay 10% interest for the use of their money.  That's $42,000!  If you only have to make interest only payments each month that's $3,541.67 per month until you Refinance and pay that loan off.  That could be 6, 12, 24 , months.  You need to know the timeline for the Refinance.  Let's be optimistic and say you get it done in 6 months.  That means $21,250 in interest payments.  This does not include closing and holding costs.

Hard Money Lender will be even more.  12% interest and 4 points.  That's $51,000 in interest ($4,250 per month) and $17,000 in points at purchase closing.  After 6 months interest total is $25,500.

All this is assuming you can Refinance in 6 months.  Which I doubt you will be able to do.  The Lender providing the Refinance loan will require a seasoning period for the rental property (6 - 12 months) after it is rented.  So that clock only starts after construction is completed and you have tenants in place.

Let's go back to the Cash Flow analysis.  Can you have positive cash flow with the above interest payments?  Do not forget to include other operating expenses in your calculations.

Don't get me wrong.  I am not trying to persuade you to not pursue the deal.  Just need to thoroughly evaluate your options.  If I were you and this being your first deal.  I would do the flip and not be concerned about the taxes.

If you do go the Refinance route be sure to get prequalified for the loan before purchasing the property.  Otherwise you may find it difficult later to find a bank willing to do it.

Brian Garrett · Answer

Have you already approached all of your small local banks and credit unions and gone over the deal with them to see if they'll lend to you? If not I would suggest you start there. Do you have cash for the down payment or do you need that as well?  If you don't have any money for the deal then you will need to find private money. Even HML's will want a down payment.

Tony Gatto · Answer

I would for sure look for an aged realtor in the area...... They have been saving my ass about 100 times....  Ask him what the deal is in the area, how fast are the houses selling in the area and why or why not....

I like to see properties that move and the upper end imo have just been a little slow in the Carolinas

Im in Myrtle beach which has tons of properties that should be moving in that price range ,,,,, but but they are slow....

Kinda high price for a first deal no?

Derrick Lubomski · Answer

@Chris Martin I appreciate the input, that is why I came to Bigger Pockets because with this being my first deal I have a lot to learn.  I had heard about the property because it is actually a few houses down from my agent's lake house, and running simple numbers it seemed like a smart deal to me with it needing minimal work, however you're right my long term goal is not to flip houses on Lake Gaston, and as @Jay Hinrichs said the list of buyers is very thin up top as not many are looking to drop 600k on a lake house. Looks like this is one I'm going to have to pass on and stick to my original plan of house hacking a duplex.

Thank you all for your input!

Chris Martin · Answer

I can't really help with any rental advice since this ($600K SFR) space is way outside my competence and, really, comprehension. The only things I would play with at that $ level are apartments and land development or redevelopment. But that's me, and my business focus (long term profitable rentals).

The right answer, if it were me, is for the owners to list the property. BTW, many times I have been 'given' the opportunity by some people who know what I do to 'take their deal' or 'buy my property... you will make money'. While I could have made some money on some of the 'deals' presented to me, they were really outside my space. I tend to pass on them, especially lately. Most of the time I recommend a broker who can list the property for them. I don't make a penny on it but it's the best answer for the other side. Again, it's me... I just don't need the distraction of learning a new angle on a market I don't know with a one-time opportunity.

Sidebar: as a private lender, I would not lend for this deal. I tend to lend 'no brainer' type deals where the principal puts down large amounts and/or there are verifiable business reasons that put my risk way low.

BTW... if this is a Lake Royale parcel, you better study (scrutinize) your numbers very carefully. That's a weird place, IMO. Even in this aged real estate bull market.

My 2 cents.

Derrick Lubomski · Answer

@Chris Mason The family owned the land, demolished the original house that was on the land and had this one built, the house is complete to an extent and the family had started to move in. I believe what had happened was they were putting off the completion of the lower level/basement and site work to do themselves, however they were older and both passed away within months of each other. Now the daughters own the house and want nothing to do with it so are looking for a payday.

DEAL OF THE YEAR...now how do I get funding?

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