Finance VS Cash on a Rental (w/Caveat)

[Cody Culberson]

Hi all, 

Question for you seasoned investors/landlords:  I understand finance is typically the way to go if the desire is to scale up to more rentals.  However, my situation might be a tad different.  My siblings and I have been willed a property that we have agreed I will buy from them at a pretty deep discount, and I was planning to buy it from them with cash.  Since it's a different kind of scenario (buying from family vs buying traditionally), if I wanted to finance this property would I just approach the bank for a traditional loan?  

At this point, buying in cash is the attractive route because purchase price + rehab would still keep me considerably under market value.  

Any help/insight would be greatly appreciated!  Thank you. 

[Elizabeth Goff]

Personally I would just buy with cash now, and then you can finance it later if/when you find another property you'd like to purchase.  Will just make the transaction with your family easier, and rates aren't that good right now so wouldn't jump into a loan if you don't need to.

[Jason Wray]

Cody,

You would buy it at the agreed price and use that as the purchase price. The Bank would order an appraisal and you would be required to have a down payment based on either it being a Primary home 3-5%, Secondary home 10% or Investment 15% down. The good thing about it being family is you could get Max seller credits to help either cover all of the closing costs or buy the rate down (or both).

If you did not have to "buy out" family right away you could do a "Gift of equity" purchase and have no out of pocket cost because it would be treated as a refinance where you can use the equity to cover the down payment and closing costs. but you would have to then take out a HELOC after you close to pay off your family (Siblings).

[Cody Culberson]

@Jason Wray, @Elizabeth Goff Thank you guys so much for the response! Jason, can you elaborate a bit on the timeline of the "Gift of Equity?" You mentioned if I didn't have to buy them out right away this would be an option.  

Additionally, could you elaborate a bit on the seller credits if I went with the first option? 

[Jason Wray]

When you do a "Gift of Equity" the home is basically treated similar to a refinance and use the "Equity from the Subject property" to cover the down payment and closing costs. But like all purchase transactions you must be in title for 6 months in order to pull cash out. So if you and your family can wait 6-12 months you can refinance the home and pull cash out to pay off the other siblings.

The benefit of the gift of equity versus the purchase is you do not need to put any cash down or come out of pocket for closing costs. You will pay for the appraisal but that should be it unless you need a 4 or 5 point inspection. 

[Preston Dean]

Quote from @Cody Culberson:

Hi all, 

Question for you seasoned investors/landlords:  I understand finance is typically the way to go if the desire is to scale up to more rentals.  However, my situation might be a tad different.  My siblings and I have been willed a property that we have agreed I will buy from them at a pretty deep discount, and I was planning to buy it from them with cash.  Since it's a different kind of scenario (buying from family vs buying traditionally), if I wanted to finance this property would I just approach the bank for a traditional loan?  

At this point, buying in cash is the attractive route because purchase price + rehab would still keep me considerably under market value.  

Any help/insight would be greatly appreciated!  Thank you. 

 Yes if you wanted to puchase with a loan just get in touch with a local lender who will get you a pre approval. I've got a team I can recommend for you. 

If you have the ability to purchase with cash I would do so, considering the current interest rates, it doesn't make a whole lot of sense if you have the cash available. 

If anything purchase with cash now and then BRRRR the property and pull your cash out after the refinance