How to Refinance a Fixer

[AJ P.]

There’s a house that need some major renovations that interested me and I was hoping for some insight as to how I should go about financing (once I’ve finished the project that I plan on buying and rehabbing in cash). I’ll explain an example scenario:

The house is listed at $75,000 and my estimate is that the property needs roughly the same amount for the rehab. All-in-all my equity value in the house would then be roughly around $150,000.

Based off comparisons in the neighborhood, the house should be worth anywhere between $175,000 and $215,000. Let’s say it appraises at $185,000 and I then want to pull my equity out of the house. 20% down would leave $37,000 in the house and in exchange only $2,000 out of my pocket ($185,000 appraisal value – $150,000 my previous equity value= $35,000 for the down payment with the $2,000 coming from my pocket).

In a perfect world, I would be able to command a rent high enough to at least earn 0% on the house to pay down the mortgage. But, if my rent isn’t high enough to pay the mortgage and I’m paying out of pocket, is this a situation I should fix and flip the house? Or do I put enough equity into the house, so I’m not getting a negative return? Should the strategy be to try and find houses at prices and rehabs that give a value that you can get in cheap enough that your rent covers the mortgage?

I guess in this situation it’s a matter of trying to build as much equity in a house vs being able to cash flow the property afterwards when I go to refinance. I’m not sure if this is something that varies on personal strategies or if there is a general role of thumb. I don’t mind having equity in my properties, but I would like to keep the equity values as low as I can so I can deplore more capital into other projects. Please feel free to share any advice or ask questions if you need any clarification! Thank you so much