| Loans from retirement fund |
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ngordonmd
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| Loans from retirement fund |
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I have a somewhat complex scenario that I will sum up quickly before asking my question. I am a resident physician looking to buy a duplex/triplex. I have lived at home for the first 2 years of residency to save money for the purchase. My original plan was to take out an FHA loan and put 10% down. However, the market where I am looking is so competitive for rental properties, that they are being bought up immediately by all cash offers.
So the new plan is to borrow from my father so I can make a cash offer, and then do a full refinance to pay him back. The only source of money he has available in that amount is his retirement fund. The first option that we explored was taking the money straight out and then putting it back it, however we found out that he would only have 60 days to put the money back in before he would be taxed on it, which would be cutting it too close. The other option would be for him to borrow from the fund, but that has a $50,000 cap and the property would likely run $250,00-$300,000.
We spoke with his accountant who said there was another option that included loaning the money to a third party who could not be an immediate relative who could then endorse the check to me. The third party would have a promissory note saying they would pay the money back with interest within 5 years and I would also sign a note saying that I would make payments to third party. I have not been able to find any information on such a transaction. My questions are:
1. Is this transaction possible?
2. Is there also a $50,000 cap on the amount
Thanks for any information/advice.
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Wed Jan 11, 2012 1:22 am |
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coaster
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Well, you may want to ignore this post, because I see an entirely different question here that you haven't addressed at all: you're a resident and you want to buy a rental property?!?!?
are you NUTS!?!?!
Sorry...., but that was my first reaction.
~Tim~
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Wed Jan 11, 2012 6:18 am |
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ngordonmd
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I figured I would get a couple of these responses when I posted this. I know that some people strongly discourage buying property, but for me it makes sense. The rental market where I live it very good. For example, the last property that I looked at was selling for $260,000. It was a triplex with a large 1700 sqr ft 2 bedroom on top, which I would live in and 2 single bedroom apartments on the bottom floor. The singles were renting for $1000 each. My mortgage with 10% down would have been between 1600-1700. So essentially I would live for free and come out a little on top each month. I realize that there are many expenses associated with owning a property, but this seems like a good place to put my money for the time being. This particular property also sold for $620,000 in 2004, so will hopefully appreciate over the next 10 years as well. If you can direct me towards an investment that will have better return than that, I'm all ears.
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Wed Jan 11, 2012 6:41 am |
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coaster
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Yes, perhaps it's a good investment, but rental property isn't just an investment, it's a JOB, and you want to take on a part-time job in addition to being a resident? That's what I think is nuts. You have to consider what your time and attention is worth. Starting a medical career demands all of your time and attention to do it well, so what kind of a doctor are you going to be if you're also trying to be a landlord; and for that matter, what kind of a landlord are you going to be if you're focused on being a doctor?
~Tim~
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Wed Jan 11, 2012 5:31 pm |
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coaster
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As far as my response to your OP, your plan of involving a third party in a financial arrangement in order to circumvent/bypass the limitations imposed in doing it directly is NEVER a good idea. IF you decide to go ahead with it anyway, just make sure it's done with a third party you can hold at arm's length and make sure you have a binding legal arrangement properly drawn up and agreed to. Doing such an arrangement with a familiar is the worst possible of all such arrangements not a good idea to begin with, and all you have to do is read through the threads in this forum to learn that.
~Tim~
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Wed Jan 11, 2012 5:37 pm |
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ngordonmd
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My parents have 2 rental properties, so I am very aware of the demands. Remember that I will be living in half of this duplex, so its just one apartment that I will managing besides my own. My parents probably average about 2-3 hours per month of managing their properties. I don't know if you realize what it takes to become a doctor, but I'm not worried about my commitment to my work. The third party is going to be my cousin who I trust as much as my own parents.
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Wed Jan 11, 2012 8:25 pm |
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oldguy
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I've been a landlord for over 35 years. The first rule is to never rent to an acquaintance, a co-worker, a friend, and never ever to a relative, always have a formal arm's length agreement with a stranger. Living in the same building with a tenant means that the two of you will be involved in each others daily routines - and will become 'acquaintances'.
The rule also works well with business dealings - not so good to involve a cousin in the scheme to circumvent a rule. And I'm surprised that your father's accountant would suggest this - at least 2 of you, maybe 3, have to technically commit fraud to make it happen.
Why not just get a mortgage - that makes the cash immediately available to the seller, almost the same as a cash offer, except for a week or two delay - I've done it several times. Plus mortgage rates are at lifetime lows, why tie up family money when you can get outside money for <5%?
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Wed Jan 11, 2012 10:02 pm |
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ngordonmd
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Thanks for the response. In response to your first point: my parents lived in their duplex for 5 years while renting out the other half to multiple people and never had a problem. I also rented an apartment from my aunt while in medical school. Again, never a problem. I have no problem collecting rent from someone who I have become familiar or even friends with. I work in a profession that is very hierarchical with people that are often my friends outside of work.
I am curious why this is considered fraud. Could you explain that to me?
I have already been approved for an FHA loan at 3.75%. However, these properties are getting 7-8 offers in the first weeks of being on the markets and the sellers are always choosing the cash offers over financing.
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Thu Jan 12, 2012 2:13 am |
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littleroc02us
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What I can't get over is that your father is willing to risk his retirement portfolio and possibly causing a major relational issue between the two of you if these deal fails???? What happens if you cannot repay this loan due to your personal finances, like you don't have a job or you get hurt, our you have to much debt and cannot afford the payments. I plan on buying real estate property in the next couple of years, but I'm taking it slow. I've become debt free minus the mortgage, I'm saving up cash for to get a fixed rate loan with 20% down with an emergency fund and an account for cash flow, so that if something does go wrong I have a backup plan. It seems like your backup plan is to borrow money. Never a good idea in my mind. I would wait until you graduate, have no debt and save up a ton of money. Just my opinion, but I don't like the great risks your thinking of taking.
Romans 13:8 “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”
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Fri Jan 13, 2012 7:41 pm |
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ngordonmd
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These forums are funny because people can't seem to get past their knee jerk reflexes and actually read my post. I am not planning on borrowing from my dad with the intention of paying him back over multiple years. Once the purchase is done, I will refinance the property through FHA within 1-2 months of the purchase. Everyone keeps saying that something bad might happen and he will lose part of his retirement, but no one seems to be able to actually give me a scenario where that could happen.
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Fri Jan 13, 2012 8:26 pm |
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coaster
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quote:
Originally posted by ngordonmd
These forums are funny because people can't seem to get past their knee jerk reflexes .
Point one - some of these people have been around these forum for awhile and learn that knee-jerk response (aka "gut feel") often come out looking pretty good. Gut feel often has a way of seeing the big picture that gets lost when you start analyzing the details. (BTW, a very good talent for a physician to have)
quote:
Everyone keeps saying that something bad might happen and he will lose part of his retirement, but no one seems to be able to actually give me a scenario where that could happen.
Point two - you're planning on a heck of a lot of things falling into place to make this deal work. Some of these people have been around life a whole lot longer than you have and have some pretty good experiences and wisdom with such scenarios having high probabilities of falling apart in unexpected ways. No, we can't provide the exact scenarios because they never, ever happen exactly the way forecast. Likewise, things seldom work out exactly as planned.
Point three: it's a pretty good principle of investing (and of life as well) that when thoughts of gain (aka "greed") overshadow and push aside consideration of the risks then it's a pretty big red warning flag that one should step back and think twice. Maybe a good thing for you to do would be to seek the counsel of a third disinterested party: a financial advisor, attorney, or someone else who has no current relationship with any of the parties involved and nothing to gain or lose from the advice they give.
The advice you're getting here seems to be pretty much agreed that what your're trying to do is not a very good idea, and regardless of the details of why different people come up with like conclusions, I think that what you should take away from this thread is that exact sense: other people with more wisdom, knowledge, and experience than you are not comfortable with your chances of success.
You're free to take that advice or disregard it, but whether you fail or succeed, we're going to be real interested in how it turns out. Please keep us posted.
~Tim~
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Sat Jan 14, 2012 6:32 am |
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oldguy
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quote:
I have already been approved for an FHA loan at 3.75%. However, these properties are getting 7-8 offers in the first weeks of being on the markets and the sellers are always choosing the cash offers over financing.
Not sure why you think a cash offer is better. In a financed deal, the seller gets the cash from the lender immediately at closing, same as he would with a non-financed deal. (I've sold some of my properties both ways, got the lump sum cash at closing in either case.)
If the problem is that you don't qualify for a loan - that is still going to be the problem after you pay cash for it - ie, you won't be able to get a $250k to $300k loan to pay off your cousin to pay off your dad. So it will drag on a few years until you qualify.
Meanwhile the IRS is going to love you guys - $250k cash going dad to cousin with no Gift Tax Declaration - followed by $250k cash going from cousin to cousin with no Gift Tax Declaration. Plus a schedule E rental income form on your taxes to write off the depreciation and pay the taxes. And then you have to unravel the giftings by gifting the $250k back to cousin so that he can gift it back to dad.
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Sat Jan 14, 2012 4:20 pm |
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coaster
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Wow, yes, the tax angle; completely forgot about that oldguy .... thanks!! If that isn't the final nail in the coffin on the three-way deal I don't know what is. Either do it straightforward or not do it at all seem to me to be the only two rational choices.
~Tim~
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Sat Jan 14, 2012 5:23 pm |
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ngordonmd
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quote:
Point one - some of these people have been around these forum for awhile and learn that knee-jerk response (aka "gut feel") often come out looking pretty good. Gut feel often has a way of seeing the big picture that gets lost when you start analyzing the details. (BTW, a very good talent for a physician to have)
I think its funny when people try to give me financial and advice on how to be a better physician at the same time. I am going to be an intensivist, which is an ICU doctor. Details are paramount, and once you start ignoring them and "looking at the big picture," patients die.
quote:
Not sure why you think a cash offer is better. In a financed deal, the seller gets the cash from the lender immediately at closing, same as he would with a non-financed deal. (I've sold some of my properties both ways, got the lump sum cash at closing in either case.)
I can't tell you why the sellers are more interested in cash offers. If I had to guess, it minimizes the chance of the deal following through. For instance, when you come with an FHA loan, an FHA loan officer has to come to the property and evaluate it. If it is not deemed a "turn key property", you will not get the loan. With cash there is little chance of the deal falling apart. So, all the places that I have looked at have had several offers placed, and the seller always went with a cash buyer.
quote:
If the problem is that you don't qualify for a loan - that is still going to be the problem after you pay cash for it - ie, you won't be able to get a $250k to $300k loan to pay off your cousin to pay off your dad. So it will drag on a few years until you qualify.
I have already qualified for an FHA loan. That is not the problem. If I thought that I could buy one of these places with a loan, I would, but that has proven to be unsuccessful.
quote:
Meanwhile the IRS is going to love you guys - $250k cash going dad to cousin with no Gift Tax Declaration - followed by $250k cash going from cousin to cousin with no Gift Tax Declaration. Plus a schedule E rental income form on your taxes to write off the depreciation and pay the taxes. And then you have to unravel the giftings by gifting the $250k back to cousin so that he can gift it back to dad.
I don't know anything about taxes and the IRS. What I do know is that this was a suggestion from my Dad's accountant who is a very successful and respected accountant where I live. My cousin also talked to his accountant who verified that the transaction was legal and will little risk to him
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Sat Jan 14, 2012 7:18 pm |
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oldguy
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quote:
I can't tell you why the sellers are more interested in cash offers. If I had to guess, it minimizes the chance of the deal following through. For instance, when you come with an FHA loan, an FHA loan officer has to come to the property and evaluate it. If it is not deemed a "turn key property",
Sounds like BS to me. But fortunately, you don't have to guess - you can simply research it and learn the answer. As for the "turn key" requirement, you may be confusing FHA with VA?
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Sat Jan 14, 2012 8:25 pm |
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