All Forum Posts by: Brandon Roof

Finding a property with equity in it, and such a substantial amount, is great. However, I don't know if it will really benefit you in this scenario. Before we address the impact tapping that equity may have (via a HELOC), it's crucial to determine what you'll experience from a financial perspective.

Recovering your down payment is huge but once monthly expenses start to hit, you may have that coming right back out of your pocket.  From what you've described, it sounds like your family member will cover the mortgage, property taxes, insurance and kick in an additional $100/month for maintenance.  A couple things you'll want to clarify here.  Does their current $900/month mortgage payment include property taxes and insurance or not?  If it does, they are not going to have any easier time paying their bills now than they have in the past as their new $600 plus property taxes and insurance could come really close or even exceed the $900/month they are accustomed to.  I'm hoping this isn't the case.

You didn't mention utilities.  I'm going to assume they'll continue to pay them as well.  If they aren't that will obviously be a significant amount of money out of your pocket every month.  The same for maintenance.  Though I don't know the area, I feel pretty confident in saying the $100/month they contribute will not cover maintenance for the year in the long run.  You may have some years you are able to skate by with it, but anytime you have to address the roof, windows, heating, cooling, etc. you're going to be out thousands more.

The way you have it structured is the property won't cash flow under any circumstances.  The family member is covering the majority of the bills but there are a number of pitfalls that you'll be stuck addressing.  Any equity that you did have will be lost through the negative cash flow you have month to month.  I'm guessing market rent for this home would be higher than $600 and for good reason.  Doing this favor for your family is incredibly commendable but it may be very costly to you.  I don't see a path to making any money here.  I genuinely hope I am missing something in the details as I'd love for this story to have a happy ending but based on what I know so far, it's not there.

I don't even want to address the HELOC in any detail at this point because we would be getting way ahead of ourselves but that would only increase the negative cash flow as you would be taking on more debt, which would increase the monthly cost of your mortgage and if your family member isn't able to pick up the increase, you will be paying for the difference. Despite them paying the majority of the bills, you'll still be stuck with other expenses and no revenue to cover it.

A few things that may simplify your equation. A HELOC on an investment property is not impossible but it can be more difficult to obtain than a HELOC on your primary residence. However, in the case you are describing, a HELOC on your investment property would be moot. In what I'm interpreting from your description is that you are looking recapture any money used from your HELOC which is exactly what a well executed BRRRR is intended to do. Let's use a hypothetical situation to better demonstrate:

You purchase a property for $80,000, putting down 25% (or $20,000) from your HELOC. For this example, the property will require $18,000 in rehab, closing, holding costs, etc. After rehab, however, the ARV of the property is now $140,000. When refinancing (which can vary from being able to do immediately to over one year depending on your lender and unique situation but plan on it being at least six months) you'll potentially receive 70% of the ARV which equals to $98,000 in this case. With the house being purchased for $80,000 and another $18,000 for rehab and other expenses, that $98,000 replenishes your HELOC and leaves you with every dollar you started with and now you have a property to boot. The main difference now is instead of your property carrying a $60,000 mortgage, it carries a refinanced $98,000, limiting your cash flow but freeing up your line of credit for any subsequent purchases.

It may be a win-win from a sense that you stabilize the housing and finances of your family member and in return you get your first investment property, but this just looks like a bad opportunity for you.  The rent is way too low for the price you are purchasing the house for.  Even if you took it over for the remainder of the mortgage ($72k) and your family member breaks even, you'd still have to charge north of $700/month in rent and that's really in a best case scenario (i.e. low maintenance, low property taxes, etc.)  However, it's likely you'd need much more than that on a monthly basis to make this a viable investment.  Hopefully other forum members will be able to identify something I'm missing but it doesn't look good at first glance.  Best of luck to you and your family.

I am not a CPA, financial advisor or anything of the like so none of what I have to offer is guidance.  I do, however, know a little bit about Roth IRAs.  I personally have never run into the same scenario you are experiencing but when it comes making withdrawals, a Roth will allow you to withdraw as much money as you've contributed into it with no penalties.  The same doesn't apply to any potential gains.  If you were looking to withdraw gains then you would be subject to penalties (i.e. if you contributed $6,000 a year ago and the value of that $6,000 is now $6,600, you could withdraw the $6,000 with no penalty but if you wanted to withdraw the remaining $600, then that would be assessed and early-withdrawal penalty).

There also shouldn't be any additional tax liability as a Roth account is for contributions that have already been taxed, allowing for tax-free withdrawals.  I hope you are able to find a local CPA that will be able to easily address your unique situation.

@Brian Van Pelt makes a great point that will that can often be applied to to friends, family, coworkers or anybody you have a meaningful relationship with as relationships can sour just as much or more than a potentially failed investment, which is often enough for a person to avoid helping loved ones when large sums of money are involved.

That being said, since you're looking at the risk vs. reward in this scenario, it could be structured in such a way that definitely limits your downside and maximizes your upside.  The lease option that @Account Closed mentioned would certainly accomplish that.

You also noted that helping your friend would tie up your capital and would make you unable to act on a true investment opportunity.  First, I wouldn't discount this instance.  This is very much a true investment opportunity.  Also, if you become owner of the property for $10k, you can potentially refinance it down the line for upwards of 70% of it's value (your stated $70k), basically getting your $10k back in your pocket along with almost $40k more to utilize towards other properties.  This, however, is only if you are comfortable utilizing it for leverage.

If done right, I think your worst case scenario is a shattered friendship at the cost of a property you got at an 85% discount, a deal people often only dream of.  Best case scenario, things go smoothly, your friend receives their disability, and you get a stock market-like return on your $10k over the next few years.  Financially, it looks like it's very much worth it.  Emotionally is certainly only a question you can answer.

Best of luck to both you and your friend.

As far as paint goes, Agreeable Gray by Sherwin Williams seems to be a flip and rental favorite in a number of areas and luxury vinyl plank is currently the floor of choice.  Some prefer a certain type or manufacturer, while others will price check between Lowe's, Home Depot, Lumber Liquidators, Menards, Costco, etc.

Some hardware can be market dependent.  Satin nickel has been the way to go though black and gold are creeping their way in.  With lighting, I often see people opt for muti-packs whether they be traditional or LED, the latter being the more expensive option, at least in the short-term.  I've never seen anybody really stray too far from vinyl blinds.  They're practical, cost-effective and can either be discarded or repaired depending on the damage without much effort or expense.

Having a uniform appearance is nice particularly if you're handy and/or self managing as you don't have to keep extra materials around for each property but rather a small inventory of items that can address a repair in any unit (i.e. an extra plank, a can of paint, a knob or handle, etc).

I say find a hardware store you like best, sign up for whatever incentives they offer and build your list out from there.

I few things to address first.  The county appraisal means next to nothing in most cases, so don't use this figure toward any calculations.  I also wouldn't be particularly concerned with offer structure at this point either unless you intend to propose some form of seller financing, which is going to be secondary to the number you propose anyway.  Also, be very careful about what you think you resell the house for, what the rehab will cost and what would like to buy the house for.

When analyzing scenarios such as this you really need to reverse engineer them by identifying the most accurate comps (bring in an agent if you struggle with this but just look for properties of similar size, characteristics and location that have sold in the last 6 or 12 months).  Once you have that number (maybe it ends up being $160k, maybe it doesn't), take 70% of it (or maybe even 65% if you're new to the process), then subtract your renovation, holding and closing costs, which will vary based on a number of factors.

In your case, let's play it safe and say the the home ultimately sells for $150k.  From there, 65% of that figure brings us to $97.5k.  We then subtract $40k for reno (because it will more than likely run on the high end of your estimate), bringing us to $57.5k, which is below the initial offer they received from a realtor and since you don't want to work your butt off for $5k, you ultimately need to offer them less than every other offer they've already turned down.

Long story short, really focus in on your estimates throughout the equation and prepare to move on when you can't make a competitive offer.  Don't start moving the goalposts (i.e. by inflating the sell price or lowering the reno budget without data to support it; using 80% instead of 65-70% in the equation above to sacrifice your eventual return) in an effort to wedge a square peg through a round hole.

Not every property you analyze works, and providing them with a "low" offer isn't taking advantage of them.  As an investor, that is simply the amount you can provide in order to get the desired return on your time and energy.  If you were looking at it as your primary residence, could get it for $100k and put $40k into it and instantly have $20k in added equity, great, but that's not the direction you're approaching it from.  When looking at a home for an investment purpose, you're offer is generally going to be "low" or else it just becomes a really expensive hobby.

In theory, this makes perfect sense and I believe it will occur to some extent as well.  However, some properties may lend themselves to be more easily repurposed than others for housing and industry (warehouses).  You'll likely have a little transition period where values decrease but will right themselves once acclimated to current market demands.  Some that are slower to adapt may fall to the wayside.

You're going to want to check with the park owners first before you make any moves.  Some parks won't allow for any rentals (unless they're doing the renting).  From there, it could go one of two ways, the latter being the more likely:

- The tenant pays you $X/month (let's say $600) for renting the trailer and pays the park owner $400/month in lot rent

or

- The tenant pays you $1,000/month to renting the trailer and lot and you forward $400/month along to the park owner.

This is by no means creative, but I think one of the key things people routinely fail at is keeping their expectations in check.  Though I don't have any hard data, I think it would be fair to speculate that a very large portion of the BP community has very grandiose ideas that will lead them to financial freedom (which can mean something different for everybody) and even though there is a wealth of resources available not only here but across the web that can make different investing strategies easy to digest in a paint-by-numbers format, the truth is that it's an incredible grind day in and day out.

Even those that have achieved "financial freedom" (or at least those we perceive to have) are still at it everyday, preserving and building upon their accomplishments.  Whether it's Buffet, Bezos or any of the bigger players in real estate, nobody slows down when they reach financial freedom.  They may surround themselves with others willing to take on the more mundane tasks they used to do but they're constantly forging ahead into the next challenge.

The way people view or approach something is crucial.  Even for those that want more "passive" income from long-term investing still have to be in the trenches in the beginning, which can be years, and once your able to get out of it, you're still dealing with contractors, property managers, staff, etc.  They also don't realize that way more people are going to fail at this than those that are going to be successful (though the definition of success can be argued).

Many are doomed from the get-go because they are blind to what it truly takes to get from where they're at to where they want to be.  Until expectations are reset and rose-colored glasses are removed, way more people will continue to fail than prosper.  Once you realize that very little, if anything, will be given to you and that there is no easy way from A to B, expectations can begin to become much more attainable.