Hybrid Flip to Rental....Any critique?

General Real Estate Investing
12yFollow

Hybrid Flip to Rental....Any critique?

Account Closed
Real Estate Investor · Novi, MI · Member since 2012 · 437 posts · 132 votes

Hi everyone,

Here is a plan that I came up with that I plan on executing very soon and would love any and all thoughts on how well it will work.

My wife and I need a place to live so my thoughts are to be able to live someplace that is also an investment for us. I originally thought about buying a multifamily and living in one unit and renting the rest out but the mortgage we qualify for right now does not give us enough capital to do this.

My plan now is to buy the absolute worst house that I can that is still in livable condition and eligible for traditional financing and rehab it while we live there. Once the rehab is done I was planning on refinancing our equity out, moving, and using it as a rental.

In my thinking in the big picture I would basically get the house for free because once the rehab was done, I could pull out all of the money that I have in it and turn it to passive income through renting it. Not to mention it would give us a place to live for a while.

The only thing I can really see that would throw a wrench in things is a seasoning period that would be longer than what we were hoping. My goal would be to get the rehab done in 3 months but I'm just concerned that I would have to wait a long time before I could refi.

Any thoughts or critique on if/how this might work?

Thanks BP!

0Reply
20 views

Most Popular Reply

Bryce Y.
Dallas, TX · Member since 2011 · 308 posts · 59 votes
12y
Originally posted by Nick K.:

@Bryce Y. You make good points and the biggest thing I'm concerned about is being able to refi without having to wait a long time. I would hate to have to wait 2 years because that means it's just that much longer that our money is tied up without earning any kind of return in the mean time.

If done right your money should actually earn a pretty big return. Example: you buy a house for 60k, needs 15k work and ARV is 100k. Say you put in a bunch of sweat equity and your only costs for rehab is 5k, not including your time of course. So assuming 3.5% down, that's $2100, plus closing costs (FHA is expensive) say 3k, plus 5k rehab. That puts you about 8100 out of pocket. You sell in 2 years for 100k, pay off loan for say 57k (prin paydown will be minimal in 2 years), say 4k closing costs, taxes/insurance/interest 3k puts your net at 36k. Subtract out your out of pocket costs and you are left with roughly 28k.

So your investment of 8k plus sweat equity made you a 28k tax free profit in 2 years. Plus you get a roof over your head. That's a pretty fantastic ROI and far from your money being "tied up without earning any kind of return."

1Reply
See this reply in the discussion

19 Replies

Jump to latestLatest
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    12y

    @Nick K ,

    You are probably looking at 6 months before you can refi. Don't count on getting all of the equity out. Depends upon 1. what you qualify for and 2. what percentage LTV they are willing to do.

    [email protected]224-381-2660
    0Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    12y

    Another thing that can throw a wrench in it is if you and your wife are not on the same page on the definition of livable condition. Living in a rehab can be tough and you should plan accordingly. It can be done but if you gut the kitchen, you will spend money on takeout. You can't live in it without water (although showering at the Y is a possibility) so decommission of the bathroom is a problem. And there are always unforeseen timeline issues like redoing the floors and it takes longer then you plan to dry. Know what you can tolerate in terms of cleanliness and chaos and try not to stretch it. It can strain the best of relationships so I can tell you from experience plan to go to a hotel or stay with friends for a day or two when the house really isn't livable and you see the renovation taking a toll....

    0Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    12y

    shop around with a local bank...better terms. I believe you can still do a rate/term immediately if you go all cash. if doing a cash out refi, shop around for one that does it in 6 months (i pulled this off).

    shop in nov/dec when everyone's drinking the egg nog. good deals there.

    & in terms of doing it for no $ down...it CAN be done and gets done all th time (though not always easy). i did it for $2k out of pocket and that's including all the refi costs.

    just keep throwing in low ball offers. maybe one will bite. a friend of mine just got one for $38k purchase price.

    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    @Account Closed

    Rehabbing while living in the property is not a good idea. It is amazing and physically unexplainable but drywall dust for one will be on everything including every surface in the house and some not in the house. It will be on all your nice white shirts and ties and more importantly will be on all your wife's clothes.

    Come up with another strategy!

    0Reply
  • Account Closed
    Real Estate Investor · Member since 2012 · 189 posts · 32 votes
    12y

    quck question...

    is the way you rehab it going to be the same way you will if were to strictly sell vs. strictly rent out? if not, what is the diff in costs?

    0Reply
  • Account Closed
    Real Estate Investor · Member since 2012 · 189 posts · 32 votes
    12y
    Originally posted by Nick K.:
    Once the rehab is done I was planning on refinancing our equity out, moving, and using it as a rental.

    ...

    I would rehab it differently than if I was strictly going to flip it. The future tenants would't need granite, stainless steel, etc...nor IMO would the market support it. It would be pretty difficult to rent out the nicest house on the whole block and expect a renter to happily pay the extra just to have those features.

    I haven't sat down yet and estimated the cost differences.

    exactly the point... when you figure out how you'll rehab it while you're in it, that should give you a better idea if you first intend to sell it or rent it... the challenge is how much do you plan to rehab it? if you're in a bubbling market, you're taking in risks of the unknown of when the market will begin to decline (and by how much)... out here in cali, the market is bubbling... if i were to buy today and sell next year.... i'm hoping that the market will still be hot... if not and i rehabbed to impress, depending on the numbers, it might become my home for a while or i may be subsidizing a renter for a while. neither situation i'd want to be in!

    in my case, the best time to buy w/your intent/strategy would have been last year! another question (as they say all re is local): are you in a buyer or seller market for the area you're looking? how about the surrounding areas? knowing what cycle you came from, in, and going to be in can help alleviate some of the risk...

    0Reply
  • Debbie D.
    Virtual Assistant · Miami Beach, FL · Member since 2013 · 14 posts · 0 votes
    12y

    Not sure your marriage would survive all the drama of living in a rehab-in-process but you might consider an FHA 203k loan to purchase and rehab (if the government decides to go back to work). You would have to live in the house for a year before you could sell or rent:

    http://www.zillow.com/mortgage-rates/finding-the-right-loan/fha-203k/

    http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou

    0Reply
  • Bryce Y.
    Dallas, TX · Member since 2011 · 308 posts · 59 votes
    12y

    I'm guessing you are planning to go with FHA financing. If so, there may be a minimum time period that you are required to occupy the property. If not, you must have intent to occupy, and if you rehab, refi, and move out after 6 months it's gonna be hard to explain that to a judge or auditor.

    If you put the minimum 3.5% down for FHA, you will probably still have to come out of pocket to do a cash out refi since you can only go up to 75% LTV. It's hard to get massive spreads doing this because the property has to be livable to be eligible for conventional financing. I don't mean to put a damper on your plan. Just make sure you run your numbers and do your due diligence.

    I think a more feasible strategy, though slower, is to live there for 2 years, put in some sweat equity, then sell tax free.

    0Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    12y

    your young...why not just live with your parents while it's being rehabbed?

    re: FHA - You have a 1.75% of the the purchase price charge at closing & then (i think) 1.5%% of the loan for the life of the loan in PMI so figure that into the equation.

    fha is becoming a joke.

    0Reply
  • Bryce Y.
    Dallas, TX · Member since 2011 · 308 posts · 59 votes
    12y
    Originally posted by Nick K.:

    @Bryce Y. You make good points and the biggest thing I'm concerned about is being able to refi without having to wait a long time. I would hate to have to wait 2 years because that means it's just that much longer that our money is tied up without earning any kind of return in the mean time.

    If done right your money should actually earn a pretty big return. Example: you buy a house for 60k, needs 15k work and ARV is 100k. Say you put in a bunch of sweat equity and your only costs for rehab is 5k, not including your time of course. So assuming 3.5% down, that's $2100, plus closing costs (FHA is expensive) say 3k, plus 5k rehab. That puts you about 8100 out of pocket. You sell in 2 years for 100k, pay off loan for say 57k (prin paydown will be minimal in 2 years), say 4k closing costs, taxes/insurance/interest 3k puts your net at 36k. Subtract out your out of pocket costs and you are left with roughly 28k.

    So your investment of 8k plus sweat equity made you a 28k tax free profit in 2 years. Plus you get a roof over your head. That's a pretty fantastic ROI and far from your money being "tied up without earning any kind of return."

    1Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    12y

    or you can just rent out your unit & go buy a house of your own! you would still keep the owner occupant rate on the duplex.

    i have done this on one of my properties. i refied to a 20 year fixed at 4.375% 3 years ago and then rented it out last year. $400/month in principal paydown is a beautiful thing.

    0Reply
  • Shaun Reilly
    Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    12y

    @Account Closed

    You have gotten a lot of good advice and other possible exit strategies.

    I think for what you are trying to do you need to think about several different possible outcomes and make sure you can be satisfied with them before taking the step of getting a property.

    Maybe you can cash out refi in a short time, but make sure you can live with it taking 12+ months. Maybe you can move and flip it for a profit in less than a year or maybe you wait it out 2+ years as was suggested by @Bryce Y. for the tax savings. However be ready if the market doesn't appreciate and maybe even takes another dip.

    I think you have a solid idea overall just make sure you think it all through.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free