Buy and Hold (Cash + Rehab + Refinance).. How do you do it?>

[Triston Murray]

Hello all. I apologize if this post is poorly written!!

I have been doing research into the hold strategy of: buying with cash (personal or borrowed), then rehabbing, renting and refinancing with conventional after seasoning. This strategy would only be used on places that can be purchased and rehabbed for less than 60% ARV.

My issue, and question for everyone I suppose, is one of preparation required, timing and RISK. I'm such a newbie to the game and only just purchased my first owner occupied multi-fam in Chicago in Feb '14. After a very dramatic 10+ months with ****** (ex coworker) tenants (BIG MISTAKE LEARNED EARLY), I hired a PM and am now looking at roughly 800 net cash flow per month after ALL expenses (including a 100/mo rainy day fund)....

Now that I'm cash flowing I want to start making moves again. SOO: does any one use the cash+rehab+refi+hold strategy? what did you need in order to get it going? is it easily rise and repeatable? did you use your own money? 

...I'm fairly young 26 and although i have decent income/ credit... not much saved... but this strategy seems so solid that I feel very confident I could pay back a family member if they lent to me... i'm even entertaining the idea of hard money loans, but am not too familiar with their terms rates etc..... I'm I wrong for having faith in a system I have not proven myself? What would others do if in my shoes to expand quickly?!

[Albert Bui]

Originally posted by @Derek Woods:

I am looking at a credit card strategy aswell. Purchase price of 25k with 5k down out of pocket. 10-15k in rehab should put the house around 80k ARV. So I plan to refinace the property to pay back all cards and my down payment. Maybe a few thousand extra to help with keep the next down payment from coming out of pocket. I have the reserves to cover the rehab costs (pay off cards). Worst case scenario. Hopefully this works. Still trying to figure out the best strategy for me.

 HI Derek,

I've personally toyed with this strategy and have learned through case studies I've worked on as well. The main problem I see is when you utilize higher than 30% of your revolving line of credit or credit card your FICO scores start to tank. If you max out a revolving line your score will probably be 75-100 points lower so when you go into a conventional lender like myself we may not be able to qualify you.

With this consideration due to FICO score management, I've started to build business credit through my entity since business credit gauged by "paydex," scores dont factor your utilization rate of a line or card against you rather the composition of your score is based on how fast you pay your creditors. This is much better since you dont have to rack your brain micro managing all of your cards or revolving lines of credit with out worrying about its affect on your credit scores and ultimately your "exit strategy."

The above happens a lot, I'll get an investor who is leveraged to the hilt maxing out their cards and revolving lines to purchase and rehab only to come to me to find out their 765 FICO is now a 640-660 and they are now stuck between a rock and a hard place.

@Brie Schmidt The other thing Brie mentioned is super important also, the DTI ratios, you should have this dialed in and planned even before your rehab project is started. Why? Because you dont want to end up like the above example with credit and fico scores but now its not with credit its with your income ratios being "off," what you need to qualify.

Last I would preface, reserves, a lot of investors do not look at how much reserves they will need to keep aside to obtain financing. Generally you'll need around 6 months of the entire monthly outflow of a property and up to 12 months sometimes for cash out refinances (depending on your credit score) and about 2-6 months for each other financed residential property. The local community & commercial banks and non Fannie/Freddie based lenders may be much more lenient with the post closing cash reserves FYI. 

I would recommend that all who are working on the buy, rehab, refi, hold strategy to plan all areas of qualification - credit, debt to income or debt service depending on the bank, reserves.

Hope that helps! let me know if you have any questions.