BRRRR, HELOC, or other suggestion?

Question

Soooo this is going to be my first property purchase. Im looking for feedback on how I can do this. If I’m doing it wrong please correct me. And thank you in advance.

I can buy my dad’s house which owes a little less than 60k, but the house is worth a little more than 120k right now. Since the house will be an investment home I’d need 25% down (15k) and closing cost around 2400 that would be a total of 17,400 to get the property. That would make the loan 45k.

First question. Is that correct?

The house maybe needs some painting and getting a renter through a property manager. (Rentometer and 2 property manager companies said the home rents for 1200/mo.)

At this point, if I follow BRRRR, I need to refinance. If I can ask for up to 75% of the home value, that means I can ask for 90k. That means I’d get 45k that I can use to invest since the original loan was 45k.

Second question. Am I understanding this correctly? If so, that’s amazing.

The other question I have is...

Should I do it like this or should I keep the original loan so I can keep lower mortgage payments and get to the equity through a HELOC? (I’d BRRRR with the HELOC)

Let me know if you need more details. And I’m open to other suggestions.

Again thank you for your time you took to help me analyze this first deal.

Killeen. Texas. Dallas. DFW. Hard money. Private money. Rent. Rental. Long distance. Investing. First deal.

Brit F. · Answer

Correct.  It would be really unusual to require a down payment on 50% LTV - regardless of the lender (bank, mortgage broker/banker, HML, PML, etc).

Don't think of it as a 'down payment' requirement; down payments are  just equity you buy to meet the lender's LTV requirements.  In your case, your Dad is gifting you 50% equity, which puts you well below the LTV maximum.

Hope that helps.

Brit F. · Answer

@Yadriel Carrasquillo,

Kudos on getting started!  A few q's:

• What will the purchase price be when you buy it from your dad - $60k? (If current value is $120k, then make sure your Dad talks to a tax professional about potential impact - there might be no impact, but it depends on his situation)
• How long do you expect repairs to take - days, weeks, months? If you're just painting, sounds like a quick 1-2 wk turnaround.
• Once repairs are completed, what will the After Repair Value (ARV) be - still $120k?
• Do you expect the value of the house to change (up or down) after 6 months?
• Is the property still cashflow positive at 75% LTV?
• What would the potential HELOC attach to - your primary residence or the investment property?

Yadriel Carrasquillo · Answer

@Brit F. thank you so much for sharing the wealth!

So if I understood correctly, you said that the 25% down is if I’m buying the property at value, but since the property already has 50% equity I don’t even need to put a down payment for the $60k?

Is this through a bank or a HML, PML?

Then you said that when I refinance I’d need to wait 6 months unless I find a bank that would do it without seasoning period.

And to make friends with a realtor that would help me with comps and insight on the market.

And the info on the LOCs is awesome.

Thanks again!

Brit F. · Answer

@Yadriel Carrasquillo,

The good news is that you shouldn't need any down payment when you purchase the house for $60k because you'll have 50% equity already.  (The 25% down payment requirement for investment property is based on the loan-to-value (LTV) ratio; it's not just 25% of the loan amount).

At Refi time, if you're going with a typical lender who originates conforming loans, the bad news is that you'll have to hold on to the property for 6 mo's before you can do a 75% LTV cash-out Refi.  Your Refi lender will require another appraisal - hence the question on value in 6 mo's because that'll determine how much $ you can pull out.  You might be able to find other lenders (small local banks, credit unions) who will ignore the 6-mo waiting period (aka seasoning period), but you'll just have to call around and ask.

I don't know much about Killeen.  You might make friends with a local RE Agent and ask them to pull comps and get their insight on the market in the next 6 mo's.  One theory is that we're entering the slower part of the home selling season.  When you're trying to Refi, it might be Feb/Mar, which means prices might be seasonally lower...but it's hard to know how much or if other mitigating factors might offset that.

About HELOCs on investment properties, it can be difficult to locate a lender.  Search around the forum - lots of threads.  PenFed might work for you; they can lend in TX, as long as you own fewer than 4 properties incl primary residence.  The sticking point is whether or not they'll be okay as a second position lien on your investment property.  I have a LOC on investment properties from local bank, but they want to be the first/only lien.  Call a local Title company and ask which lenders have been doing HELOCs on investment properties recently.

Yadriel Carrasquillo · Answer

@Brit F.

Thank you! And thank you for the questions too.

-my dad only wants what he owes. So the purchase price would be $60k. Thank you for the tax recommendation. I’ll do my homework with him on that.

-the house is well taken care of. My dad did the roof and the a/c not too long ago and still has warrantee. If I were to expand on rehab needs I’d say the house also needs a 3’x10’ slab of cement to complete a walkway in the backyard, install a door to hide the water heater that’s on the movie room/garage conversion, and paint just for the new house look. I could do the slab and door in half a day and a visit to family I got there. So the paint would take the longest and I’d contract that out.

-the ARV is more like $125 from some  Zillow comps. $120 to be conservative.

-since I’m new at this I don’t know how to tell if the price would go up or down yet. Maybe you can recommend me some sites to help me study gdp msa ahi and any other metric out there. But I’ve found that Killeen has one of the lagest military US base, A&M is attracting students and that Killeen is growing southward (the area the house is located. They built a Walmart and a HEB nearby. I believe Starbucks is near too so I believe the prices are going up

-from the numbers I tried doing I’d have a 8% cash flow ROI

-the HELOC would be attached to the investment property.

I hope I answered your questions correctly.

Thank you for your time again

BRRRR, HELOC, or other suggestion?

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