Board Topic: rental property financing
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rental property financing

Posted by: todd siebert Feb 10 2004, 06:31 PM
my scenerio:
A relative of mine currently owns a house that she inherited from her dad. She has offered it to me for
$20,000 and I plan on using it for rental property. It is currently vacant but has potential gross market rent at or around $700/month. It has a recent appraised value of $38,000. I need about $7,000 dollars for repairs and make ready, thus increasing my loan to 27,000. My relative is also willing to transfer the deed into my name if it will help with financing, and then settle up with her after the loan is processed.

my question:
What is the best way to go about financing this property so to achieve as little out of pocket expense as possible. My relative is very flexible. For example, if rental history is needed she would be willing to allow me to rent the property for 1yr and then proceed with the loan closing.

Posted by: loanuniverse Feb 10 2004, 08:32 PM
Todd:

You asked:

”What is the best way to go about financing this property so to achieve as little out of pocket expense as possible. My relative is very flexible. For example, if rental history is needed she would be willing to allow me to rent the property for 1yr and then proceed with the loan closing.”

Good thing about the whole scenario is that you mentioned that your relative is flexible. Now let me think about how to do this with the least amount of expense.

The first question that I would have is how is your credit and do you have a job? If the answer is “ok or good” to the first and “yes” to the second, there might be a way to do this with no upfront fees of any time. I know you are thinking commercial loan in this case, but a residential type program might be your cheapest source of financing. Before I proceed let me remind you of a couple of things:

First, make sure you read my disclaimer. I make no warranties or recommendations as to the quality of my advice.

Second, I am not a residential lender. My knowledge of that subject while better than your average person is limited. I am also not an attorney.

Finally, there are dozens of ways of doing this. I am not sure if this would be the cheapest, but I can assure you that it won’t be the most expensive, and that if anything there won’t be much of a difference in pricing {fees and rates} from the cheapest way to do it.

Ok now to the answer:

I would do as follows:

1- Get your relative to transfer title of the property to you. Not sure if a “Quit Claim Deed” will be enough, but ask an attorney.

2- Assuming that the property is free and clear, you are now the owner of an unencumbered asset worth $38,000.

3- Get a Home Equity loan from a lender. Almost all banks and S&Ls offer them. Shop around for the best price. You want to go with one that has no fees. These types of loans can go up to 100% of value, but normally top at 80% of value for the best rates {$38,000 x 80% = $30,400}

You said that the property needed some repairs. How long will they take? Usually residential loans have an occupancy clause. You can live in the property during this time and with luck the occupancy clause will expire by the time is ready to be rented.

Going with a commercial loan for such a small amount will be difficult. Going with a residential mortgage might seem attractive due to the lower rate, but you almost surely will have closing fees. There is no law that says that the home equity loan has to have a first mortgage in front of it.

Hope this helps.
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