Should I Refi to Finance Next Deal?

Question

So...I bought my first property in Dec 2014 and finished the rehab in February. Spent all of March working to get the Section 8 inspector in (failed the first time around), and am finishing up the "fix" items so I can pass the second inspection. I have a renter lined up (clearly) and will likely have them in within the next month. Not a bad start, had some great mentors (the best!). Litterally couldn't have done it without them.Now that this project is making its way into the "landlord" phase I'm thinking of doing a refi to fund my next deal. I think it makes for a good strategy (buy, rehab, rent, refi), but would like some advice from seasoned investors.

Jeremiah B. · Answer

Grats on your first deal! Sounds like a good one!It's a good strategy - but be sure you talk with a lender early in the process as there are several pitfalls to watch out for - and your options will often depend on how you purchased the first place.Generally speaking, I understand that there are two options (verify the specifics with your lender):1- Traditional cash out refi. This is only an option for investor with 4 or fewer mortgages. If you hold a house for six months, you can have the house appraised, and then pull out something like 75% of the new value. 2 - Delayed financing. This is a special type of cash-out refi that can be used for properties 5-10, and MUST be done within 6 months of purchasing the house. The house is appraised and you can finance something like 70% of the appraised value. You must have paid cash for this to be an option. It is also quite rare to find a lender who can do this, but they do exist (PM me if you need someone). This is the strategy I've used a few times with moderate (it lets me buy in cash which is nice, the I don't get as much cash back as I think I should).In either option, the appraisals often come back very conservative - and in my personal experience - have been ~ 5%-15% below actual market. Both options also cost money, so be sure that the money is worth the cost.Happy hunting.

Jerry Padilla · Answer

@Andrew Schlessinger @Chris K.You can do cash out financing on the properties. Here is a link to my blog with information on asking prior to and after 6 months.http://www.biggerpockets.com/blogs/5110/blog_posts...

Andrew Schlessinger · Answer

All,Thanks for your input. It sounds pretty straight forward. I don't see any other way around it if I don't want to use HMLs. I estimate that I'll have built in an extra $20K equity after repairs, so getting my cash out of it seems reasonable. I may fall a bit short of the entire cashout amount if the bid comes in low, but not enough to keep me from buying another house and doing it all over again. Having learned a lot with the first purchase, I'll be doing the rehab on the next rental differently...more conservatively...more sweat equity on the simpler things (demo, painting, kitchen installs, etc.). I could do it before, but wanted to see how my contracter approached the job. He was great, really walked me through my options. Though I didn't take all his recommendations (should have in retrospect), I was able to see what they were. I also met an investor that operates out of the same area, whose been very helpful in talking to me about what he does and doesn't invest when rehabbing. Putting everything together, hopefully the next rehab will be more economical, if not less expensive.Andy

Scott C. · Answer

That way should work for you. As long as you are our figuring those costs in and it still keeps your properties at a positive cash flow.We have done a similar thing to build up our portfolio (4 SF Townhomes and soon to be 1 more). We bought the first two using a mixture of cash and home equity on our primary residence. Then we got home equity loans on those two properties for cash reserves and buying power for future deals. The last two were more conventional 15 year mortgages.For our new one it will be a cash deal because it has to be because we bought it through Auction.com. Then we are going to do an immediate cash out refi to get our cash back out of it.Take care,Scott

Matt Madalis · Answer

I'm not necessarily a "seasoned" investor but think it will depend on a few things.How did you pay for the first property? Cash, conventional, hard money?How much equity do you have in after rehab?It would alsodepend on what your goals are as an investor. If it is to expand your portfolio into additional buy/holds and the price is right, refinancing can be an option.You can also set up a HELOC for short term borrowing to fund additional rehabs, etc.

Chris K. · Answer

That's exactly what I'm doing so I'd say do it as long as you're comfortable with it. It will definitely make things easier if you want to keep moving forward.