Which Strategy would you pursue?

[Phil C.]

I am looking at a couple different strategies and would like to get everyone’s perspective on which would be the most beneficial or which one you would pursue. Background – I have purchased and manage two duplexes with a friend and partner and am looking at purchasing some more over the next few years while the market is still good for this type of investment. The strategies are as follows:

1. My partner has suggested we save up some cash and purchase a SFH or multifamily for cash. Then once it is rehabbed and rented we would take out a loan on it for 50-75% LTV to get some of our cash back. The benefits/problems of this are as follows:

a. Asset Protection - We could make the purchase in the name of the LLC. My partner is very risk averse so this is a big one for him. Although I am not sure if we would be able to get long term financing afterwards if the property is held in an LLC.

b. Quick Offers – We would be able to make an offer very quickly without worrying about financing.

c. Better Offers – Banks prefer cash offers so we might be able to get a larger discount.

d. Opportunity cost of cash – this is a lot of cash that will be tied up in one property. We may not be able to pull out as much cash as we would like once it is completed.

e. Slow process – this takes time to save up enough cash to do a deal like this and then repeat. I think we only have a couple years to acquire these properties at today’s discounted prices. Rates are also likely to rise in the future.

2. Use a rehab loan product that a local lender is offering. It requires that you put 25% of purchase price + repairs into escrow. The loan funds the purchase as well as the rehab. Once complete as long as the appraisal comes back ok you get all of your cash back. Benefits/risks are as follows:

a. Less cash – I would only need about 25% down most of which I would get back after completion of the project.

b. Double closing costs – There are two separate loans, first the rehab loan for six months and the second would be long term 30yr financing. I have been told both closing costs come out to about $8k

c. More risk â€" There are more things that could go wrong here â€" timing, appraisal, interest rate risk, property would not be held in an LLC.

d. Quicker timing in between purchases – I would not have to wait for me and my partner to save up cash, I could take advantage of the low rates sooner, less time in between purchases

3. Third option is use FHA financing to purchase an owner occupied home. I might do this first since I am renting at the moment. I would only need 3.5% + closing costs. The only problem with this is that since I would be living there it would need to be a much nicer area. This would take a lot more time to find a property that works both as my homestead as well as an investment when it comes time to leave. The plan would be to live there for a year or two and when I move out keep it in my portfolio as a hold.

There is only so much time & money to go around so I would wonder what everyone here would choose to do in this situation. Feel free to ask questions as I am sure I have left out some of the details. Thanks for the input.

PS. Sorry for the long post. I have been thinking this over for a while and would really like some other opinios.