Help with first deal

[Dustin Lee Cotliar]

Hello smart investors of BP! Long time listener/reader, first time poster. 

My spouse and I are buying my parents house to help them out (long story but needs to happen). The house will likely appraise for 170-180K. Will need around 30K worth of repairs and upgrades. Plan is to buy from them and then have them live in the house for the rest of their lives and pay us a VERY discounted rent and we could cover repairs etc. It seems as though they would be willing to sell us the house for 130K. They owe about 90K on the mortgage, and would get a nice chunk of funds from the sale. I was thinking of getting a 'construction loan' to cover the purchase and construction; from what I understand its unlikely that I will need to put anything down because of the discounted purchase price. Then once complete, use a HELOC loan to pull out the equity and invest it into another property. Will likely try and get a 30yr loan, say 5% interest. We have perfect credit and have never purchased a house before/taken out a mortgage loan. I want to then pull out the equity and buy a duplex or something similar and eventually want to either get into multifam or commercial. This is near Baton Rouge, LA

*If you had to be in this scenario, is this the strategy you would use? Anything you would do instead?

-

[Robert Leonard]

Here's how I see the numbers you presented: 

$170k = ARV

$130k Purchase Price = 76.5% of ARV

~$30k of Repairs. Where is it coming from? You said two different things: "we can cover the repairs" and "use a construction loan to cover the purchase and construction." Which one is the actual case?

If your parents owe $90k, the only way they get the "chunk of funds" is if you pay them $130k and then do the repairs. That would mean you put $160k (94%) into a $170k property.

If the property is worth $170k, you can borrow up to 80% ($136k) of the value of the property. There will be transaction costs (appraisals, closing costs, loan fees, etc.) that all come out of what you can actually "take out" when you refinance.

Where will the equity come from to buy the next investment?

Just FYI, when you first start doing this, repairs usually run twice what you expect on cost and time.