Will This Financing Strategy Work?

Question

Hey all, so I am planning on getting into house rehabbing and flipping in Spring 2016. I need a little time to build up some more funds, and do more research, and get a good team of contractors, real estate agents, etc together. Now I'm not going to have enough cash on hand to finance everything by myself, so what I am thinking of doing is the following.

1. Get a 100% home equity loan in the amount of ~$35,000 from my rental property.

2. Use $10,000 of that to put down 20% on a ~$50,000 fixer upper house, and another ~$5,000 for closing costs

3. Use the remaining $20,000 to rehab the house, and pay holding costs.

4. Try to sell for around $90,000 - $100,000, and make $10,000 - $20,000 in profit hopefully.

Does this sound like a doable plan? Am I missing anything big? Does the financing sound like it would work? To give you more details about my financial situation, I currently own one rental property, a single family home that is worth about $130,000 now (conservative estimate, might be more). I owe roughly $88,000 on the mortgage. It is netting me roughly $550\month total profit before taxes. I plan on buying a primary residence home within the next few months, so I will have another mortgage of about $800\month, including property taxes, insurance, PMI, etc. By the time I would start rehabbing in Spring, I should be able to save at least $10,000 in my bank account as an emergency fund. In addition to that, I have about $6,000 in gold\silver, and $10,000 in retirement accounts.

Any advice would be greatly appreciated. Thanks in advance :)

Tim Porsche · Answer

Hi Mindy,

Thanks for your response, that is the kind of feedback I was looking for. I wasn't sure that a 100% HELOC would be possible to get on a rental property, so I'll have to look at alternate ways of acquiring the funds needed. To answer your questions...

How sure are you of your ARV? - I'm not actively looking at any properties to flip at this time. I wouldn't start until Spring 2016 at the earliest. When I do find a property that I'm interested in though, I'll do all my due diligence and make sure we are confident of the ARV based on what other comps in the area have sold for recently.

Do you have any recommendations for contractors? - Again, I'm not looking to start flipping until 2016, so I haven't gotten that far yet. I'm trying to tackle one piece of the puzzle at a time. Right now the puzzle piece I am working on is how to finance the flips. If I can't do that, then the rest doesn't really matter.

Don't forget to factor in selling costs when figuring out how much money you will put into the flip. Have you read J. Scott's book, The Book on Flipping Houses? It comes with a free bonus book The Book on Estimating Rehab Costs. - Yes! I am actually about 3/4 of the way through it now. Great book and I'm learning a lot from it.

Since getting a 100% equity HELOC probably isn't going to happen, finding a partner just might be the best way to go. My struggle is that I don't have any experience doing this, and in a partnership, both parties should bring something to the table. What am I going to be able to bring to the table, having only about $15,000 to contribute, and no experience? Ideally I'd like to find someone to front about 80% of the costs associated with the flips, while I do all of the work and planning. Ideally they would be an experience flipper, and could also function as a sort of sanity check, to confirm a deal is as good as I think it is when I find one. Do you think I'll have trouble finding someone like this since I have no experience flipping?

Mindy Jensen · Answer

@Tim Porsche, welcome to BiggerPockets.

While I hope you do succeed, I think it will be very difficult - if not impossible - to get a 100% HELOC out of a rental. I don't think you can find a 100% HELOC out of a primary residence.

How sure are you of your ARV?

Do you have any recommendations for contractors? They are notoriously difficult to find - at least a good one. Bad ones are everywhere!

Do you have an idea of the area? Have you been watching prices? Find an investor friendly agent now who can set you up with emails when new properties go on the market.

Don't forget to factor in selling costs when figuring out how much money you will put into the flip. Have you read J. Scott's book, The Book on Flipping Houses? It comes with a free bonus book The Book on Estimating Rehab Costs.

I think a better idea would be to partner with a more experienced flipper on your first deal. Connect with someone on BP or join a local REI club. It is very easy for a $10-20k profit to turn into a $10-20K loss.

Adam Bartomeo · Answer

Tim,

Creative financing can be a GREAT option. You just have to be careful not to dig to much of a hole. I am doing something's now that some people would consider risky but I know my numbers. Here are a few things that I have learned from experience.

1. Be careful of doing too much. Its like the guys that spend hours setting up dominos. If just one of those dominos doesn't fall the last one will still be standing. Meaning you have a lot of moving parts to this. It may be better to seek out a loan from family.

2. I don't know your area but it is much easier to get good flippers if you pay cash for the property. I am fairly certain that if you find a good deal there will be others bidding with cash. This also helps with getting the price of the property down.

3. Know your rehab costs before entering into contract. During the inspection period I can rule out some of my earlier costs if I find something that doesn't need to be fixed but I always start on the high side. You make your money when you BUY not when you sell.

4. $10,000 - $20,000 isn't enough for a flipper. If something goes sideways you will be in trouble. A crack in the foundation, carpenter ants, rotting decking, to name a few, can cause major snags.

Tim Porsche · Answer

Thanks! I'm planning to and really excited about it. So you think my idea about getting a $35,000 100% home equity loan (I read these are hard to find, is that true?) and then a traditional 20% down mortgage would work?

Also, with a traditional mortgage, what things need to already be in place in the house for them to give you a mortgage? I know you need to at least have a stove and a working water heater. Say I find a house that doesn't have these two things but is a great deal, is there a way I could still get the financing via a traditional mortgage? Sorry if these are dumb questions, I'm just trying to think everything through.

Franklin Romine · Answer

No risk no reward.  I say go for it.

Frank