Real Estate Investor · Aurora, IL · Member since 2008 · 125 posts · 14 votes
What does everyone think about using credit cards to start for cash/ rehabbing/ down payment money for a first time startup. Im new and I know I have a lot to learn, but am just curious about picking peoples brains in this area. Has anyone done this? In short, I have a mentor who is basically going to help me find a great deal where my rehab/cost of property will be below 50%. I then would refinance to take the equity and pay off my credit card and since I have such low rates would actually be cheaper than paying back some investors. This then would give me a decent amount of money to put down for my next rehab project.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
If you're going to do this, keep in mind you'll need to do a "cash out" refi. Be sure you're approved for the refi before starting, and that you know the max LTV the lender will allow. These days, its pretty low on cash out, 70%, maybe 80%. You may have seasoning issues, too. This strategy worked great two years ago when money was easy. Not so easy now. If you have a good job, and good, documented income, and the value is really there, you should be able to get it done. Just figure that out before you start.
Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes
17y
It’s a dangerous game. However, I started like that. I used all of my cash to make the purchase and used credit cards for the rest. I came pretty close to losing my shirt this way. The credit card payments are much more than a loan would be. Another problem, is that when you max out your credit cards your FICO score drops like a stone, making it very difficult to get approved for a cash-out refi.
Real Estate Investor · Aurora, IL · Member since 2008 · 125 posts · 14 votes
17y
Thanks for the info Jon. I havent quite learned all the acronyms yet, tell me again what the LTV stands for? My mentor says not to worry so much about the refi because he would either back me for the refi and become a partner on the deal or find a broker that would be willing to work with me. I just have trying to find good investors and really nobody takes me as serious as I should be just because of the whole starting out business, which I totally understand. But someone in my shoes and the drive to make a deal happen, I am going to look at every possible way even if it may look stupid to some.
Real Estate Investor · Aurora, IL · Member since 2008 · 125 posts · 14 votes
17y
Thanks for the info Richard: I had thought of that and that is why i wasnt planning on maxing out my cards. I was just going to use 50-60% of the availability which would drop my credit a little but HOPEfully not drop like a stone.
I make a decent salary as an engineer and banks are willing to get me loans for the purchase, but the rehab is a different story for the loans. I am just weighing in all my options. I figure if I could find a killer deal that maybe it would be worth it to pay an extra couple thousand and start now instead of later while still realizing what Jon says; of knowing if you can make it work or not at the worst situation.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
LTV is loan to value.
Seasoning is the time you've owned the property.
If you buy a property for $60K, spend $10K to fix it up, it might be able to turn around and sell for $100K. Some lenders will look at the value as $100K, provided there's good support for that value (comps, actual work done, a valid appraisal.) Others will view the value as $60K until you've owned it for some length of time, six months, maybe a year.
It would be foolish, frankly, to not understand your exit strategy.
You should try to make your first deal extra good so you have some room for mistakes. As opposed to a marginal deal just because you want to do a deal.
If your mentor is making a buck out of this deal, for example, selling you this deal, taking a cut, or doing some of the work, be leery. Not saying anything bad is happening. But when someone stands to make money by you doing a deal, especially if they make money whether you do or not, you need to watch out for being pushed into a bad deal.
Have you investigated hard money? If you get a hard money loan, you can get both purchase and rehab money. Then, when you go to do the refi, its a "rate and term" refi rather than "cash out". Much easier, and higher LTVs. Plus, the lender will be a double check on the quality of the deal.
Real Estate Investor · Aurora, IL · Member since 2008 · 125 posts · 14 votes
17y
Would the bank usually make the purchase and rehab as one loan or would they be two seperate loans. My goal overall is to go more a long the lines of rate and term refi instead of cash out refi.
Real Estate Investor · Aurora, IL · Member since 2008 · 125 posts · 14 votes
17y
Actually Im a little lost after reading that into more detail. Basically in a chopped down example. Lets say I want to buy a house for 40K, and I need to put a rehab of 20K in. My expenses are 60K. I get the house/apartment appraised at 125k. There is 65k in equity or value there. I would want to refinance so that way I can take that 65k and put it as payment towards my next purchase. Would this be more like a cash out or a rate and term? Also if I did this approach could I use the 1031 exchange? This is all taking into consideration that I have some cashflow even after the refinanced loan is taken into consideration.
Also last question: If I wanted to pursue down that path with the economy and the way banks are loaning, then is it that I will realisically only be allowed to take about 70-80% of the value out? So in the example from above if I had the 65K in equity value I would only actually be able to refinance for 87.5k if I was able to refinance on 70% of the 125K value? Hope that isnt too confusing.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
OK, lets say you somehow come up with $60K to buy and fix this house. You own the house free an clear. You go to the bank to refi the house. They appraise it for $125K. Because you're not paying off another note, this is a cash out refi. I'm pretty sure you could find someone who would give you 70% of the value, even with minimal seasoning. Might take some searching around, or you might have to wait six months or a year. If you find a lender, they would loan you 70% of the $125K value, or $87.5K.
Now, how do you get that money? One way would be to get it from a hard money lender. If those are the real numbers, it should not difficult to find a HML would would loan you enough to buy and rehab the house, as well as some for the additional transaction costs and holding costs. The rate will be painful. Probably somewhere between 1-6 points (a point is 1% of the loan value) and 12-18%. This would be a short term loan, 6-12 months. Once the rehab is complete, you can do a refi. This time, its a rate and term refi, as long as you don't get more than about $2000 in cash from the loan. You pay off the hard money loan. This is usually easier than a cash out loan.
You won't be able to get the last 20-30% of the value out of a property. Realistically, you don't want to. That last 10% of equity is not really there, because it will cost you 10% of the value to sell a house. You don't want to end up upside down if you have a small decline in values. If you're at 90% LTV, any decline at all will put you underwater. 80% gives you a little room, 70% is better.
1031 is a separate issue. Its only relevant for property held for investment. If you're rehabbing and selling the houses, its not relevant. If you're holding them for rentals, then selling after a year or more (not a hard and fast number, longer is better), and buying another property, you can use the 1031 to defer the taxes on the gains that you roll into the new property.
Banker · Toledo, OH · Member since 2008 · 24 posts · 4 votes
17y
as a mortgage broker I would like to make you aware of the diffuculties of obtaining cash out refinances on non owner occupied properties. As of right now there are very few, if any, lenders that are lending money on cash out investment properties. Not to mention with little seasoning. Things have changed so much over tha past couple months that much of the finance advice you will get on here might be a little out dated. No offense to Jon Holman as the number of posts speaks for itself. Many of the lenders will also even go further than the 6-12 months of seasoning if you are trying for a much higer value than your purchasee price. Also be aware that if you are trying to flip and sell there is a 6month flipping rule for FHA mortgages. Most potential buyers will be qualifying for an FHA purchase becuasee they are the easiest to obtain right now.
Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes
17y
I think that no matter what your mentor says you need to go check out your cash out refinance options NOW. Don't wait until you need it. Get some definites from a mortgage broker and a local banker on the what they are offering on their cash out refinances. I would look to get pre-qualified now, and find out what their FICO score requirements are just in case you take a hit with your credit card strategy.
I would disagree that "most" potential buyers right now will be using FHA but "many" is an adjective I would be comfortable with. Understanding the seasoning requirements on a refinance and a resell are essential for you to not get stuck with the house longer than you are expecting.
If a buyer is using an FHA loan, there is a 3 month prohibited flipping time and within 6 months a second appraisal is required.
Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
17y
Tyler - you may consider flipping a couple deals. If you can buy and fix at 50% of market value, you could sell it on the cheap... get you're borrowed money back and 40-50k of working capital (in your example).
Remember to factor in interest cost, your time involved, and overages.
Wholesaler · Amarillo, TX · Member since 2008 · 1k+ posts · 659 votes
17y
I need to eat some crow with my "most" comment in reference to FHA loans.
I do about a dozen rehab to retails a year and the last one I sold was was via a conventional loan but it was almost two months ago, so my current interaction with retail is not as up to date as some other investors.
After I made my post I contacted a friend of mine who does 4 or 5 times the rehabs to retails I do, and he hasn't sold a house on a conventional loan in 2 months. He does mostly lower end but all of them have been FHA recently which is not normal.
So with this added information I would lean more towards "most" loans being FHA right now and less towards "many" of them being FHA.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
Originally posted by Eric Veronica:
No offense to Jon Holman as the number of posts speaks for itself.
No offense taken at all. The lending environment seems to be getting worse and worse. I'm hearing its harder to get a takeout loan for hard money loans, too, and even for those seasoning may be required.
Banker · Toledo, OH · Member since 2008 · 24 posts · 4 votes
17y
Ryan,
I have done one conventional loan in the past year. There are a couple reasons why people arent doing conventional loans
1. Declning markets... Many areas are considered declining markets which drops the allowable LTV and makes it more difficlut to obtain PMI companies to insure
2. Interest rates.... There is a huge jump to pricing if the borrower has a credit score lower than 720 or an LTV over 80%. And lets face it, in todays housing market not many people have a 20% down payment.
3. Lower monthly mortgage insurance when using FHA.
---I priced out a loan yesterday for a gentleman who qualifited for both FHA and conventional. The rate for FHA 30 year fixed was 5.5% compared to a 6.625% conventional.
I apologize for getting off topic or credit card financing. I just get carried away sometimes
Real Estate Investor · Aurora, IL · Member since 2008 · 125 posts · 14 votes
17y
No worries about getting off topic. I have since decided to focus all of my energy in gaining more investors instead of using credit cards for the main down payment and has been working out well. Im close to about half of the money I need for "proven liquidity."
Real Estate Investor · Mountain View, CA · Member since 2008 · 234 posts · 32 votes
17y
I would say if that's your car in the picture, perhaps selling it and getting something a bit more spartan would also go a long way toward improving your "proven liquidity". If you want to be successful, in my opinion you need to take what may sometimes feel like painful steps in order to do so and that may include a change in lifestyle.
Real Estate Investor · Aurora, IL · Member since 2008 · 125 posts · 14 votes
17y
I would sell my car, but with the way these specialty cars are selling, I would actually lose thousands of dollars, and with me being so young and paying on time, my banker says its helping raise my credit score..Plus I actually have many investors that I am in the works of setting up which will help me get started, so Im good to go.