I'm stuck. What is the best way to get my cash back?

Question

Bought my first house in October with cash. Inherited AWESOME tenants: seniors with a 9 year track record who will likely rent until they die, take great care of the home, pay their rent on time, etc. Planned to rehab with them there to keep them, prevent vacancy and pull my cash out in the spring when I refinance before rates get jacked and market shifts....typical BRRRR in a slightly different order. I did not raise the under market rent because they were willing to put up with a rehab. Signed a 6mo lease due May. I thought this would give me a safety net in case I was unable to get the rehab done on schedule because all the contractors were so backed up and because I have never done this before. Goal was to raise rent when it got done. But most importantly, keep good tenants and get my cash back and more than I started with, right?

Problem is they have STUFF. EVERYWHERE: the basement, attic, and garage is full of boxes. Contractor says bad idea to do with them living there. Would likely help appraisal if there was less clutter. Also, my numbers tell me that I need to raise the rent to the tune of an additional $300/month to median market value to break even once I refinance it. Yes break even. Not a killer deal but it will do fine over time and I looked at it as a ticket to get into 2-3 other investments and check off the "first deal box." I'm new. I'm learning.

Someone suggested to me that keeping the tenants is low risk. I could raise the rent gradually and skip the rehab until they vacate at some point. This is attractive because of the good cash flow ($500/mo); I could keep the tenants, and save 30K on rehab. Except my cash is all tied up! Further, I don't want to burn my very reputable contractor who has just spent a few hours with me on a walkthrough/plan with budget/estimates to follow. (I was lucky another experienced investor shared him.) At minimum, I figure I could pay him for his time and hope he will still consider future rehabs with me, but the number one question if I did this option: How can I get my cash back so I can get more real estate? I'm totally stuck and I don't know what to do. Please help:)

Joshua Janus · Answer

I would advise paying him for his time if you really value that reference, and delay the renovation. These tenants seem to be a sure thing from what you've described so losing that wouldn't be ideal. Could you just get a mortgage on the property and pull a bunch of cash out? It may not appraise for more now but leave that for the future. You already have a lot of equity you can leverage to buy a 2nd and maybe 3rd property. No sense rushing the updates if it isn't the right time in this situation.

Theresa Harris · Answer

Look at the big picture.  You are pulling your money out and paying for the refinance as well as the renos and getting a larger mortgage. Did you run the numbers before?  What if you skipped the renos and refinance?  You then save on the renos (the tenant is already happy with the place).  You say you are cash flowing $500/month now as you paid cash for it, but after renos and refinancing you'd need to raise the rent $300 to break even.  Why not get a small mortgage for the place now?  You wouldn't get as big of a return.  You're looking at a max of $17K (don't forget financing charges and potential overages).

Were you going to borrow the money to do the renos?  or did you have that?  To me, I'd leave things as they are and save up for your next deal or use the money you were going to use for the reno for the next place.

Alisa K. · Answer

Thank you Teresa. Yes I did run the numbers but I made a mistake by not running the numbers on the refinance part. At that time I had not finished my BRRRR book yet! I’m learning as I go because I did not want to stay on the sidelines without investing because there’s no way I could ever learn all I need to know before I took action. I have 30 K in cash that I was going to put into the place to rehab it. Honestly, after reading your post, I’m getting more comfortable with settling for less cash out because the rehab will be a lot of work and not much reward (17k but potential loss of long-term tenants). I’m beginning to think my 30 K would be better invested in something else. My rent would still be below market value but I could keep the tenants and slowly get there. Even though they may be disappointed that I am not going to fix the place up as originally planned, I’m sure they will be thankful that the increased rent that would accompany a rehab will not put them in need of a home.  Please share any additional insights that you might have for me :-)

Alisa K. · Answer

Thank you Brandon. Just saw your post.

Alisa K. · Answer

Hmmm. Maybe I just need help with what makes sense when I look at the numbers?

I paid 113K cash. (100K came from my 401K.) I was planning to put in 30K for rehab making my all-in number 143K. ARV would be about 200K, and 80% of that is 160K, leaving 40K (20%) but giving me an infinite ROI and an additional 20K. I would break even with the refinance and not make a lot in cash flow until a few years out, but gain 20K.

Back to your question, yes I could get delayed financing now but it would only be about 90K vs if I BRRRR'd and got 160K. But I would have the 30K in addition that I would be saving by not doing the rehab, so 120K, 40K less.

Are my assumptions making sense?

Brendon Pishny · Answer

@Alisa K.

Typically with inherited tenants it’s easier to just leave them alone until they decide to leave. Possibly slightly raise the rent at each renewal. In your case where you really want your cash back out I think you will just have to ask them to leave at the end of their lease. Then rehab and rerent at market rate. Then refinance. I think that will be hard to do with them occupying the unit. And yes I would pay the contractor for his time unless you think he’s going to get the job soon. This is all just my opinion. Hope it helps.

Alisa K. · Answer

Oopps. I forgot to add the difference in cash back now would be 90K and later after rehab, 160K so more buying power. Assuming my estimates go as planned.

I'm stuck. What is the best way to get my cash back?

Most Popular Reply