I have located a Quad (2/2 per unit) for 32k asking price. Making arrangements with my contractor and the listing agent to have a walk through of the property. This is actually my first investment property and I am wondering if I am missing anything. My plan of action is below.
Use cash from a IRA to purchase the property cash ( goal is to negotiate for a 25k or lower purchase price)
Go through a private lender to do a cash-out refi to replace IRA cash escrowing out the rehab expenses
After completion hold for cashflow. ARV of property is estimate ( in this market) 150k plus.
Any suggestions or critiquing would be appreciated.
If you’re going to be doing a lot of work to the place, I’d make my first priority to split the utilities if it hasn’t been done already. Don’t sweat the water too much, but definitely get the electric split.
I figured it’ll be easier to refi a property owned free and clear rather that try to do a purchase. My thinking is that I’d be coming in on a lower LTV and avoid having to put anything down or pay upfront points.
Is my thinking on track with today’s lending environment?
By splitting the electrical, I’m assuming you mean have each unit independent of the other in case someone defaults, making the tenants responsible for the utilities rather than lumping it in with the rent?
Yes…under NO circumstances do you want to be responsible for paying their heating/cooling bills. Water isn’t terribly expensive, but electric and gas will eat you alive. If you have that much rehab to do, take the extra step to meter the units separately. It will save you in the long run.
As a LL, if the tenant is responsible for the electric, you could give a crap whether they pay their electric bill and have their lights on or not. In many states, it’s illegal to shut off a tenant’s utilities. Do you want someone stiffing you on rent, but then still having to pay their electric bill?
I am surprised that cashing out a portion of an IRA, purchasing the property, refiing, then contributing back into the IRA would be easier than going through a lender. Wont you pay penalties and taxes on your IRA cashout, then potentially buy investments previously held in the IRA at at high price?
$25-32K loan for a property that has an after repair value of $100K seems like a no-brainer for a lender to jump on.
If this is your first deal and the renovations are extensive, you will have a big learning curve. My advice is to take your time hiring the right general contractor and make sure everything in the agreement is in writing. And don’t give him any money up front - only pay for work that has been completed.
Go and talk to your bank. It’s possible that your easiest financing will be to take out a personal loan secured by your IRA.
A cash offer is your strongest offer. Most sellers know that funding can be difficult and sales fall through becasue the bank says no. So they love to see an offer with no financing contingiency.
After you own it, you have time to go from bank to bank and make more than one application to refinance. It will also be easier to get a traditional bank loan after it has been repaired. Banks are quesy about properties that need a lot of repair.