Can I control property with this much cash? Or what's my best route?

Question

I have about 35k saved up which was going to be the down payment on a house or condo, but I'm thinking I might hold off on that for a while to get started in RE investing.

I had entertained ideas of wholesaling but... frankly after my experiences pursuing that, I think it's basically a crack dream.

So, I would like to get into rehabbing, but I don't really see how I could acquire a property since even the rough ones go for at least 100k here in NYC.

Is my best option to acquire a property using my cash for the down payment and a loan to cover the rest of the cost? Or what else could I do? Are there some other types of investments I should do for now instead to build up my cash until I have enough to just buy an entire property outright?

Jon Holdman · Answer

Your best bet is a local REIA.  Start talking to people and ask if they know anyone.  Look for ads in the RE section in the paper that say "money to lend for real estate".  Start calling mortgage brokers.  99% will have no idea of what you're talking about, but eventually one will.

The $31K in the example would be treated as short term capital gains.  That's taxed at ordinary income rates.  So, the $31K goes on top of whatever income you already have and gets taxed at your marginal rate.

You should plan on using a CPA.  A good one will know exactly how to handle all the various expenses to minimize your taxes.

Jon Holdman · Answer

Hand money lenders will lend based on the ARV.  The exact limits vary widely, so you'll have to find some in your area and see what they will do.

I know of one here who will go 80% of purchase plus 80% of rehab, up to 70% of ARV.  She charges 2 points and 12%, interest.

So, if you can buy a house for $100K, and it needs $20K in work, and it would be worth $180K when fixed up, she would lend you $80K for the purchase and $16K for the fixup.  You would need to put in $24K for the purchase and rehab. Two points, $1,920, comes off the top.  You'll have to make interest only payments of $960 monthly.  You'll have to pay for some of the work up front, then get reimbursed as its completed.  If it takes you six months to fix up and sell, you would have about $8000 in money costs (points plus interest), plus insurance, utilities, and the like.  So, that comes pretty close to chewing up your $35K.  I get $32K adding that up, and something always goes wrong.

You sell for $180K, paying $18K in closing costs, commissions, and seller concessions, netting you $162K.  You pay her back $96K and yourself back $35K, leaving a profit of $31K.

Rinse and repeat.

Corey Demuth · Answer

how do I locate hard money lenders in my area? do i need to go with a local lender?

Corey Demuth · Answer

I somehow did not realize it was 65% of AFTER REPAIR VALUE, that makes a lot more sense. Thanks a lot for the explanations!

One other question, in this situation, how much tax would I realistically end up having to pay for having earned that 31k?

Account Closed · Answer

You're good to go. Just got to find the right market.

Scott M. · Answer

Hard money generally doesn't go to 100% - 75% is a "normal" max but a lot will not go higher then smaller numbers like 70 or 60.

So you will have to put $$ in - HML will want you to have skin in the game.

You need to find something that leaves you $$ left over for rehab.

Also - remember your buying that 100K property (ARV) for 70K or 50K or whatever and that is the amount your financing.

or if you say homes (even rough ones) go for 100K - well - are they worth more after reahb - if they are worth 150K that is what the HML will loan on.

So in that case you can get a 70% LTV from a HML - kick in 5-10K (with closing costs) and then spend the rest on the rehab and holding.

Some HML will let you in with no skin on your second + deal as well so it does get easier the more you perform.

Scott Williams · Answer

If you don't own a primary residence you could combine buying a house or condo with rehabbing and investing. Just look for a great deal on a fixer and refi it after you finish the work.

Or maybe invest in a different, cheaper area.

With hard money the highest loan amount will be roughly 65% to 75% of the after repair value, so the better deal you find the more of your loan you can spend on repairs.

I think there are a couple of other financing rehab options depending on your situation. The fha 203k loans are one, and the Fannie may Homepath loans also.

Corey Demuth · Answer

in that scenario, suppose I buy a house for 100k

so my 35k is the down payment and I borrow 65k via hard money...

Then where does the money for the rehab come from?

Or are you suggesting that if I prove I have the 35k, the hard money lender will give me the full 100k and allow me to use my 35k to rehab it (and carrying costs, etc)

?

Doug P. · Answer

Yea from the info I have got if you are willing to put that money into the deal you should have no problem getting hard money if the deal is good.

Jon Holdman · Answer

Look into hard money or construction loans.  You have enough cash that a lender should be pretty confident you can cover the overruns, upfront costs, and interest payments on a $100K deal.  So, if you can show its a good deal, I would think you could find someone to fund your deal.

Can I control property with this much cash? Or what's my best route?

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