Board Topic: How to get started?
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How to get started?

Posted by: Tony D May 3 2004, 05:09 PM
My father currently owns a building that he runs his own business out of, plus has one other long term tenant. He is looking to sell it and pay off some debts and semi-retire, but still maintain the business in the building.

I am very interested in buying, but I have little to no cash to put down. He would pay me rent, along with the other tenant. If I were to theoretically borrow 100%, on a 20yr note, I would still have positive cash flow after paying the mortgage, insurances, and taxes. All utilities would remain the tenants responsibility. The building is in excellent shape.

Is there any creative way I can make this happen? Keep in mind I am totally new to real estate investing, but if I can get my feet wet with a friendly tenant, I do want to buy more properties down the road, possibly even incorporating into a realty management company. Thanks!!

Tony

Posted by: loanuniverse May 3 2004, 06:08 PM
Tony:

There are several ways to make this happen, but the best way from my point of view is to ask your dad to keep a second mortgage on the property when he sells it to you. This way you collect rent from him, and he collects mortgage payments from you.

Doing it this way will give you the kind of loan-to-value that most mainstream lenders are looking for, and will avoid you having to go into more expensive options.

Good luck.

P.S: I almost forgot... take a look at a spreadsheet that you can find at http://www.loanuniverse.com/sensitivity.html plug in the numbers to see if the rental income can repay both loans. It is not just about positive cash flow is about the lender being comfortable with the repayment. There has to be a cushion.

Posted by: Tony May 3 2004, 06:46 PM
Thanks a bunch!! Can you breifly explain how the 2nd mortgage works?? I am not familiar with this process!! Thanks again!!

Tony

Posted by: loanuniverse May 3 2004, 08:06 PM
Can you briefly explain how the 2nd mortgage works?

I think that is easy to explain with the following example:

The property is worth $100,000 and your dad will sell it to you for $100,000. However, you got no money for the down payment and no mainstream lender will lend you more than 80% of the purchase price.

To finance the purchase you need a loan from the lender in the amount of $80,000 and a loan from your dad in the amount of $20,000. Both of them can be secured by mortgages, but there is an understanding that the lender gets to file it first with the state. This means that the lender gets paid before your dad does in case of default.

Not really complicated, just need your dad to be willing to do it. Unless he has plans for the money or owes more than 80% of the value of the property to a lender then I donít see much of a problem.

You need to talk to a commercial lender in your area. Someone that can give you feedback and can go over the numbers. The promissory note and the mortgage that will support your dadís loan to you can be done by an attorney and should not be too expensive.

By the way, the more information that you take when you meet with the lender the better. Of course talk to your dad first and see if he feels comfortable with the idea.

Good luck

Posted by: Tony May 4 2004, 01:03 PM
One more question:

Who or what factors decide the interest rate on the 2nd loan? Is it the bank, or the person who will be carrying the loan? Is it possible that the loan could be 0% since it will be a family member?

Tony

Posted by: loanuniverse May 4 2004, 01:14 PM
Well, that is actually three questions biggrin.gif


Who or what factors decide the interest rate on the 2nd loan?

The seller decides what rate he is going to charge and the buyers agrees or negotiates.

Is it the bank, or the person who will be carrying the loan?

The bank cares mostly about repayment as long as the debt service from the second mortgage is not high enough to impact your ability to repay the first. There is no problem.

Is it possible that the loan could be 0% since it will be a family member?

In a transaction where the seller and buyer are not related, this arrangement would make me wonder if the sales price is not inflated or if there is something out of the ordinary. In this situation, it would not worry me too much. You can probably get most banks interested in this. Not uncommon.
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