What are some options for funding a rehab project?

[Karen M.]

Dear BP friends --

I am thinking of buying a property for cash.  However, I am concerned about using up all of my non-retirment money on a property deal.  It's just scary.  We obviously need to have an emergency fund for our family, and it feels good to have some cash around, so I can't throw every last cent into 

So, I'm trying to think of options to scratch up money for a rehab.  The property I am considering has a good interior, but definitely needs a new roof and may need a new air conditioner, furnace, electrical updates, etc.  

Option 1 -- run up a credit card?  Ack!

Option 2 -- take a Home Equity Loan on my primary residence?  Ack!

Option 3 -- beg  encourage family members to loan or invest (aka the Brandon Turner method -- see podcast #92)  Ack!

Option 4 -- find a partner or a hard money lender  Ack!

Option 5 -- cash flow the rehab through a monthly budget --- maybe I'm not going to say Ack to this one -- maybe this is the right idea here. 

Option 6 -- 401k loan??  Ack!

What am I missing?   What would you do if you had enough to buy the home but not enough, or maybe not quite enough of a comfort level to self-fund both the rehab plus a cushion?  

(Note: I am a daily Dave Ramsey listener, but I get very torn about where Dave Ramsey meets up with real estate investing.   I am OK with some debt, but I don't want to put myself in a risky place, so I need to be prudent and very conservative about managing the money.)

I am not sure if this is the house, but I might make an offer and see what happens!  But, I'm scared and not sure about stretching the budget.

Also, let's talk about exit strategies -- Ack!

1.  Sell it for below market value

2.  Fix it and sell it for market value

3.  Rent it out  

My main idea is to keep the property and rent it out and hold it,  or to sell it.   It might actually be a good flip (I need to run the calculators), but I desire to own a rental and it might be a very nice rental too.

Thanks for any conversation. I appreciate it!!

Karen

[Will Barnard]

Karen, I detect a lot of fear and skepticism on your part and perhaps Dave's teachings have made you too conservative when it comes to leverage. The most powerful tool in RE I know of is leverage, of course tools must be used responsibly, however, when that happens, good things come of it.

You said ack to almost every option in your first post. While I agree it applies to a hard money loan or even a private money loan when your strategy is buy and hold, I think the HELOC or just a low LTV bank loan at what are currently historic low rates are both EXCELLENT options. I 100% disagree with those who believe in owning free and clear homes as it is not much different than placing $100k (or whatever number you are working with) in cash in a safe deposit box.

Owning free and clear always gets the argument that your cash flow is greater and while that may technically be true, by applying leverage, you can increase your cash on cash return and obtain arbitrage from borrowing at lower rates than what the investment yields. What I mean is, if you were to simply borrow from a bank at 4% interest for 15-30 year terms for $50k (say 50% loan to value assuming purchase is $100k), you may have less cash flow as you have debt service, but if you place that $50k into another asset yielding above that 4%, you have just created arbitrage and additional cash flow. Certainly your buy and hold assets produce returns greater than 4%, so each asset supports having debt service and by using that option! you will have even more cash flow and even greater tax benefits and net worth.