How to finance 2nd oroperty

Question

There is a SFH my relative is selling at auction due to personal life circumstances. They said they would sell me to directly if I wanted the house. They're hoping to get 150k for it, but sound willing to take less. In its current condition, I believe it would appraise for 160-170 and after updating the house cosmetically, probably 180 or more if I had to guess.

If I’m able to get an offer accepted at below 150, say 130 or 140, and put 20% down, would I be able to pull my money out of it @ the 80% after the appraisal? I may be totally off here. Any suggestions on how to best structure the deal in order to put down less cash or be able to take the cash out if I buy it low enough? It would be a long term rental. The home needs about 10k worth of work.

River Sava · Answer

Hi Taylor -

As others have mentioned, when buying a property below market value, it’s essential to document its condition and get an independent valuation. This helps avoid issues with lenders when refinancing down the road.

If you buy your relative’s house for $130k-$140k and put in $10k of updates, make sure to get a Broker Price Opinion (BPO) and/or a formal appraisal to show its true value. The proper documentation will allow you to justify the increased value to the lender during the refi thus allowing you to pull out your initial investment and possibly more.

Happy to connect and discuss this further if you have questions!

Mike Klarman · Answer

So the spread would worry me.  You're saying 140k purchase and you can get it worth 180k?  And what figure 30k in upgrades at least and even that isn't too much.  Remodel a kitchen/bath/new paint/maybe some new LVP flooring?

So if the project cost is 170k including purchase and rehab and you can get 180k value after then does not work as a fix and flip.

As a rental, let's say you have a 30 year DSCr with a loan amount (180k x 80%) 144,000.  You'd have a payment of about 1500/month let's call it for argument sake.  To make it worth a hold, you'd want to charge at least 1850/month.  Is that possible?

Ethan Gidcumb · Answer

Hi @Taylor Robertson,To answer your original question, most lenders (private and conventional) will refinance an investment property up to 75% Loan to Value (LTV) of it's current value. This can change depending on the lender but that is what I have seen across the market in the time I've been in the industry. My advice on how to structure the deal is to find a purchase price that is as low as possible for your pockets, but also makes sense for your family because you'd never want to do them dirty. Getting it at a low purchase price means more profit for you and strength in the investment for other lenders. The only thing you have to be aware of is that most lenders have a minimum loan amount of $75k-$100k so a smaller deal may limit you to the number of lenders available, but there'll still be something out there for you.- Like Devin Peterson said, buying it in all cash would be great for your pockets on the refinance, but that may be a tough ask from you. - Like Robin Simon mentioned, most lenders will want a BPO/Appraisal to close anyways, so this will be a great check to make sure it's worth your time. - Patrick Roberts gave some really great advice! If you choose to use a DSCR loan, the refinance will be qualified based on the cash-flow of the property. So you won't have to upload any documentation for income and employment. DSCR loans are most impacted by the property's cash flow and your credit score. - Derek Brickley brought up a great point about Seasoning requirements. Seasoning is the amount of time you need to wait to refinance a property if you borrow money to purchase it in the first place. Seasoning periods, or the time you need to wait to refinance, is different depending on who you are working with. Most commonly, I see that clients can do a rate and term refinance after 30-days of ownership but most people wait 6 months to be eligible to do a cash-out refinance. I know this was a lot. It looks like you have a ton of great resources to learn on for this exciting opportunity. Good luck!

Derek Brickley · Answer

So is this a primary residence or an investment?  If you are purchasing the home with financing, then you would need to wait for the seasoning requirements per each program.

Patrick Roberts · Answer

You need to talk with a lender about your particular scenario before pulling the trigger. There are a lot of factors at play that are hard to what-if over the internet based on a couple sentences of info. Some considerations are the type of loan (Conventional, DSCR, etc), the type of property, the market the property is in, the location, your income and employment, the timeframe on the cashout - the list goes on.

Generally speaking, you *should* be able to cashout refi up to 75-80% LTV of the appraised value after rehab, usually following a seasoning period. The seasoning requirements, LTVs, and drivers of the difference in purchase/appraisal values will be effected by the loan product. I'd recommend getting a finance plan in place before buying. Depending on the circumstances, it's very possible that you're not able to cashout refi the property and you'll want to proceed with a different strategy.

Buying in cash is probably cleanest. I dont think the margins support hard money or two loan closings on this one.

Robin Simon · Answer

HI - not sure if linking is allowed here but I just put out a piece on advice on this exact topic (https://www.biggerpockets.com/forums/517/topics/1196250-tip-...) - you should be OK but it would behoove you greatly to get some sort of documentation like a BPO (Broker Price Opinion) of the value now for use later in the refi!

How to finance 2nd oroperty

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