Acquired 2-unit pre-Coronavirus, should I push to rehab or wait?

Question

Greetings BP fam – I acquired a 2-unit in Chicago in late February 2020 with the intent to BRRRR. Top-line numbers:

• Purchase price: $45,000 cash• Rehab estimate from Project Manager & Contractor: $100,000• Conservative ARV: $260,000• Projected cash-out refinance after fees & interest at 70% LTV: > ~ $22,000

I had a hard money lender (Temple View Capital) lined up and literally the week I submitted our scope of work for the rehab budget was the week the Coronavirus started affecting the US, slowing the economy, closures, etc. They required only 10% down. 10% of $100K rehab means I would only be $10,000 in to get the rehab going.

Long story short – Temple View paused lending for a while and recently put out a statement saying they would continue lending but requiring minimum 25-30% down for all loans. I totally understand, a lot of lenders are locking up or increasing their requirements now.

My team in Chicago recommended either waiting for things to even out or possibly taking out a conventional loan at 70% LTV to start the rehab. But I don't want to invest another $30K into the property right now since I own a donut shop and the virus has taken a big toll on our cash flow. I need to stay liquid.

Question / TL;DR: Would you recommend pushing to get rehab going now and possibly putting down a higher down payment for the rehab loan? Does anyone know of hard money lenders still lending at 10% down? Or would you recommend waiting until things shake out and return to somewhat normal in the lending world before getting the rehab loan?

If I waited, the good thing is I own the building outright, so no mortgage or interest. Just minor utilities as monthly holding costs.

I appreciate any and all insights.

Eric Johnson · Answer

Juan, I would hold off for right now. It's not worth the risk to start the job and end up with money paid out without the result you are anticipating. (ie 50% completed projects sitting etc...)

Account Closed · Answer

Bummer.  It seems like the need to be liquid with your donut shop is more important right now.  Better safe than sorry. What a frustrating situation for you.

Erik Hatch · Answer

Juan

Is Lori Lightfoot even allowing construction right now? Im in the suburbs and Chicago seems to get more strict by the day. Im conservative and cautious at the moment. Cash is King IMO.

Juan V Lopez · Answer

Account Closed – You're spot on – the bigger priority is keeping my retail shop alive. We can wait on the property. Stinks, but that's the reality of things. I really appreciate your opinions.

Juan V Lopez · Answer

Account Closed– thank you for the response. The property is in very bad shape as is, unlivable. Big fixer-upper. Unfortunately, small work on it would not be enough to put it on the market for rent.

Account Closed · Answer

What shape is the property in?  Would it be possible to rent it as-is?  Or with minimal cosmetic stuff you could do yourself?

Rick Ortiz · Answer

@Juan V Lopez

I was in the exact same boat with Temple Veiw Capital. My project was smaller $75k rehab but similiar story nonetheless. Just submitted my scope of work etc..

I opted to not proceed for a few reasons. One was (like you) paid cash and i have no mortgage on property so no need to rush. Second was how do I know there funding wouldnt dry up half way through a project and then im screwed with a half done project and god knows what legal issues. And due to virus and economy  i have no idea what apprsisal im getting 6 months from now. And now without using their money i can use less expensive albeit unlicenced contractor for some work, and stick with licensed electrician and plumbers only when necessary for major work. Thus im saving money and i dont have some hard money lender up my ass while the economy goes to shit. Downside is now im using my own cash and need to pace myself accordingly.

Odie Ayaga · Answer

I may know a lender who could work with the down payment, but I'm not sure I'd even recommend doing that with such a high rehab budget unless you've got a good idea of what things are like with construction in the city. A lot of places have issues with permits even when they can get contractors out to get the work done.

Juan V Lopez · Answer

@Erik Hatch – I appreciate that. Haven't heard anything official regarding Mayor Lightfoot's directives in Chicago, but I can imagine it's just going to get tighter. Thanks for your perspective.

Mike B. · Answer

One other thing to consider is that when lenders loan on the construction, they are reimbursing the money you pay out. It's rare that a lender will give you the funds upfront. Given the area and budget, I'm assuming your contractor will need a sizable deposit to get started so you would need that plus your down payment. Make sure that you're on the same page with your contractor.

Acquired 2-unit pre-Coronavirus, should I push to rehab or wait?

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