All Forum Posts by: David Morgan

I have a few questions about investing in real estate with a Roth 401(k): 1.) If at age 45 I buy a vacation rental, and at age 59.5 I want to start using it for family vacations, would I first need to distribute the property? And if I then needed to sell it, or I died a year later, how would the basis be determined? (I'm not in a common property state -- would it matter where the property is located? ) 2.) Would seller financing or seller carryback without a personal guarantee count as non recourse lending? 3.) If I max my Roth 401(k) contribution -- let's say I can put no more than $30k into it based on my income -- can I put an additional $5500 into a traditional IRA and roll it into the 401(k)? If so, how soon? 4.) Assuming I have a Roth 401k at etrade, where half my account is tied up in equities, and the other half in cash, can I move the cash portion into a new self-directed 401(k) to use for real estate? How does it work if you want to trade stocks and options as well as real estate and paper? 5.) If I'm a sole proprietor this year, but get smart and form a single member LLC next year for my self employed earned income, can I use the same 401(k), or will I need to start a new one? Thank you for your help!

@Paul Papamarkos

If you're not going to pay your aunt for her half interest in the property for a year, you could do a one-year note with a balloon at the end. You could set the amortization and interest rate wherever they need to be so your payments to her would be roughly equal to the rental income -- even do an interest-only note if you want -- and then you'd pay off the rest of the principle after a year when you refinance.

The problem will be the refinance. Will you own your mother's half by then? 

If you're going to have your mother's interest in a year, either through inheritance, gift, or paying her for it, once you have it, you could refinance and buy out your aunt at the same time, skipping the whole one-year note business. Depending on how you got your mom's interest, there may be seasoning requirements before you could refinance. But if you think your aunt might sell to someone else in the meantime, you're better off either buying and recording an option, or doing as described above and getting on title and setting up a note.

But if you'll only have half interest in the property, you might not be able to refinance, at least, not without your mom's permission -- otherwise you'd be putting a whole house up for security that you own only half of. I'd talk to a bank or mortgage broker and a title company to see what would be possible.

I'm not sure a bank will give a loan to buy half interest in a property. How are your mom and aunt listed on the deed, are they tenants in common? I've never done anything like this, so hopefully someone with more experience will comment.

@Paul Papamarkos

Will your aunt sell her half to you with seller financing using a promissory note -- so you get your name on title (with your mom), and you pay your aunt monthly payments until it's paid off? Maybe you can buy it from her that way with little or nothing down, and with a good interest rate. Benefits to her are, she will continue to get monthly checks, she'll make more on it than a lump-sum sale because of interest payments, and she may be able to spread any long term capital gains tax liability out over several years as an installment sale.

Lines of credit, cash-out refis, private money, hard money, sub2, wraps, owner financing, lease options, land contracts, parterships -- there are lots of ways to get into your next deal. Some are better than others.

@Brent Coombs, I've got exit plans A, B, and C, and though I keep rearranging their order, selling subject to didn't cross my mind even once! 

If I fix it, rent it, refi, I might hold it a few years and use a 1031, death, or the combination as an exit plan. Do I get extra points if I arrive at the 1031 because a tenant exercised an option to buy?

Everyone who has replied to this thread, sent private messages, shared your docs and forms by email, and made yourselves available on the phone, thank you. What an amazing, supportive community. I found an attorney who is getting it done as a sub to. I'll have insurable title, the seller is thrilled, and after giving a local bank the documentation they requested, looks like there will be backup financing if I need it, even without seasoning -- they just need to review the contract, and that's in progress. I imagine there would be an appraisal at some point if I actually do end up needing their loan, but so far, so good. A 3-branch bank is coming through in a big way. And, here's the kicker, I can also get lines of credit on my other investment properties from them. That greatly increases the number of deals I can do. I thought I might end up having to use the other rentals as collateral for this deal if the note is called, but that doesn't appear to be the case now. Lots can still go wrong, of course, but I'm over the first big hurdle and much more optimistic than I was several days ago. The seller is letting me market and show the property before closing, and their realtor is letting me use her pro quality photos. Hope to get some good applicants for a lease option before closing, we'll see. This has all been a big leap out of my comfort zone, and it might just pay off. Thanks again.

@Justin D. --

There are lots of loans with good terms for first-time home buyers, loans that someone who already has a mortgage won't have access to, like the USDA and VA loans, which are 0% down, FHA loans which are 3.5% down -- and sometimes you can get a HUD home with a FHA loan for $100 down (that's what we did). Quicken has a 1% down program, and lots of other banks have loans with small down-payment requirements. Some loans may include repair costs in escrow, so if you find a house that needs work and you can get it at a price well below what it's after repair market value would be minus the cost of the repairs, that could be an option. Just keep in mind the lender is unlikely to release the funds to you all at once before you make the repairs, it's more likely you'll get reimbursed for repairs in stages (called "draws") after you complete them. The loan might also require the work be done by a licensed contractor, so read the fine print.

Some states and cities also have first-time home buyer down-payment assistance and forgivable rehab loans for certain areas and certain incomes.

Different lenders have different requirements regarding property condition. You can search on Google with terms like "USDA loan property requirements." A knowledgeable mortgage broker will be able to tell you which loan would work best for the condition of the property you're looking at.

Two loans good for rehabbing are the FHA 203(k) and Fannie Mae Homestyle. These loans let you borrow for more extensive repairs. Ask your mortgage broker about them. Some of the work you may be able to do yourself, but again, read the rules.

As for mortgage insurance, the fastest way to get rid of it is not to get it in the first place -- put at least 20% down and you won't need it. But that's not what I'd recommend.

In my opinion, the best way to get rid of mortgage insurance is to get a great deal on a house, then refinance once you've got 20% equity. It's straightforward. All you need to do is find a bargain when you buy the house in the first place.

With a really good deal, when the total costs of your purchase and any repairs you'll need to make won't exceed 80% of market value after repairs, you've got 20% equity as soon as you fix it up. Now all you have to do is wait 6 months, and then you can refinance. (Some lenders might let you drop the insurance and keep your current loan after a new appraisal, which would be a much cheaper way to do it than refinancing -- something else to ask your mortgage broker about when you're loan shopping.) Boom, no more mortgage insurance.

Really you need to shoot for total purchase and repair costs at less than 80% market value to account for the costs of an appraisal and closing costs for the new loan. Due to these costs, it really only makes sense to refinance out of the mortgage insurance if you're going to hang onto the house for a few years. Otherwise, another great way to get rid of mortgage insurance is to sell the house and take whatever equity from it into your next house.

Of course, there are interest rate considerations, too. By the time you're ready to refinance, the interest rate for your new loan might be higher, and it might make more sense just to keep your mortgage insurance until you've paid down enough of the loan that it drops off.

With your credit score, you might qualify for a loan right now, depending on your debt-to-income level. You don't have to have zero debt or a perfect credit score to get a mortgage -- I'd be surprised if there was a significant difference in interest rates between 780 and 800. 

My unsolicited advice would be, and I'm sure there are many who would disagree -- hang onto as much of your cash as possible when buying a first home. Get into a house as soon as makes sense for you, as cheaply as possible in a good neighborhood that might experience some appreciation, and if you're single or your family is up for the adventure, go for a duplex, triplex or 4plex instead of a single family home. Take the money you didn't end up using for a 20% down-payment, any cash flow from the other unit(s) in your house, and maybe even the cash you didn't use yet to become debt free, and -- assuming you already have a 6-month emergency fund set aside -- put your surplus into buying another income-producing property. At this point you'll likely need to put at least 20% down, 25% for a much better rate. Not doing that on your first home could put you miles ahead in building wealth, because you can put that money into an additional passive income stream.

Welcome, @Jeremy Payne. I think you'll find BP a great community to help you reach your goals.

@Tom Gimer, @Nick Rutkowski

I checked out the local REI group's site and contacted the attorney who appears to be one of their sponsors. I definitely need an attorney to write the contract, so far everything is verbal or in email, and up in the air. Hopefully this attorney will do it.

@Mark Allen

I offered that yesterday. Seller said if we can't close in the next couple of weeks, they'll take out a loan to get the repairs done.