How to Finance This Deal

Question

Hey guys! I'm working on my first deal and am in an unorthodox situation, at least compared to the traditional strategies I've studied. Here are the numbers:

Purchase Price: $5k

Rehab/Closing/Misc: $30k

ARV: $75k

My long-term strategy is to build my portfolio of buy and hold rental properties, therefore I would like to do that with this one, considering it'll cash flow around $450/month after PITI, vacancy, maintenance, etc. The issue therein lies with lenders not willing to help because of the imbalance ratio between the lower purchase price and high rehab costs. We are closing on 1/31/14 so the clock is ticking. Any advice or insight into the best strategy for me would be excellent. I thank all of you in advance.

Jeff Pollack · Answer

Hey Jason,

With that kind of difference between purchase price and rehab costs you ant to take advantage of being able to borrow on the ARV and get into this with little or no money out of pocket in the end.  You need to either go in with a loan (private $ or hard money) that covers purchase price plus rehab and then do a rate-term refi on the ARV (you'd be able to pull out the $35k of purchase + rehab and roll the loan costs into the new loan).  Unless you have experience and a prior  relationship most hard money lenders will not fund the purchase plus rehab.  You're better off doing a private money loan with a friend or relative.

The other and probably better option is to buy with all cash and wait 6 months and a day to do a cash out refi as Minh suggested.  Do you have a day job and 401k?  You can borrow up to $50k or half your 401k (whichever is less) and pay yourself interest of 4.25% amortized over 5 years and a 401k loan does not affect your DTI.  Or you can take out a HELOC on your primary residence to cover the rehab.

Ping me and I can give you the contact info of a hard money lender I know in TX who may have a product that could help.  I can also give you the contact info for my mortgage broker, who could be useful in this case.

Cheers,

Jeff

Brandon Hall · Answer

@Jason Measures I am currently figuring out how to finance my first deal as well. I will use a hard money lender and either sell after I flip it or refinance with a conventional loan for the monthly cash flows. The advantage of using a hard money lender is that you will have a set of expereinced eyes looking at the deal and telling you whether or not it is a good one. Sure you pay the high interest rate, but I won't mind paying that rate for the education I will receive and the extra set of eyes analyzing my deal.

Account Closed · Answer

Jason,

Private lenders are your relatives and people that know you well. Next option is bringing in an equity partner. Remember the saying 50% of something is a whole lot better than 100% of nothing?  HELOC is a great option, but talk to your potential lenders first. Run the proposed scenario by them. Ask them to get a verbal confirmation/approval from their underwriter to be sure. Worse case scenario, you flip or wholesale one of the deals to raise your working capital.

Account Closed · Answer

There are quite a few lenders that will do 75% LTV with 6-month seasoning after closing date. That means you can cash out about $55k after 6 months. Get a positive cashflow property with another $20k tax free/deferred in your pocket after 6 months is a pretty sweet deal. If you go to the big banks, they typically require 12-month seasoning. Start talking to mortgage brokers and you will find one that can help you out.

David Beard created a thread naming several lenders that do cash out refinance with 6-month seasoning. You the search function to look him up and his posts.

Good luck.

Jeff Pollack · Answer

Ann has a hell of an idea there Jason.  You can get a Home Depot credit card as she suggests to cover all or most materials for 0%, though it may only be for 6 months so check.  You can also do this.  Get one (or more) credit cards with 0% interest on purchases for 12 months (there are even some that do 18 months).  You can cover all your materials with free money and pay it off when you cash out refi in 6 months.  Assuming you are using a contractor that has a PayPal account and accepts credit cards you can pay for the entire rehab (materials, labor) with that 0% interest credit card and pay it off after you do the cash out refi.

Good luck!

Cheers,

Jeff

Ann Bellamy · Answer

You may be able to get all or some of the rehab funds from hard money, but each HML has their own criteria, so call as many as you can find in your local area.  Many won't like the rehab $ being 6 times the purchase price.

Second, you can fund almost all the materials on a Home Depot credit card for 0% interest, that will get you a large part of the rehab cost.

Brandon Hall · Answer

@Jason Measures I haven't though I also have not been able to dedicate as much time to searching for deals as I would like (CPA studying struggles).

Honestly if I were you I may still want to speak with a hard money lender. At least hear what they have to say even if you don't use their money.

Jason Measures · Answer

Hey @Brandon Hall! The strategy you suggested was certainly my strategy as well until this super cheap house came along and threw a wrench in my plans (not that I'm complaining about a $5k house of course!). Have you found your first deal yet?

Dewayne Gammel · Answer

@Jason Measures

you can use hard money. I have a place that will loan 65%LTV of ARV. The 65% includes closing and rehab. It's an interest only loan so you will want to refi ASAP!

Jason Measures · Answer

Thank you for the quick response @Minh L. My plan is to cash out refi after 6 months but I need to fund the rehab initially. While I could afford to fund the purchase and rehab myself, I do not want to tie up all my cash because I have two other deals lined up in which I need capital for. What do you suggest I do for the initial rehab loan? Private lender (I currently do not know of one)? Hard money? HELOC or HEL after closing (if there is a bank that will do that)? What do you think?

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