Best Strategy for Leveraging $150k?

Question

Hi All! I work very closely with a rehabber in Baltimore City and therefore am often coming across deals that don't quite work as flips but would be slam-dunk rentals. Until now I have passed on this opportunity. However, I now have $100k to invest and I am looking for advice for the most cost-effective way to leverage this money. The caveat is that I'll likely need to fully repay the initial $100k in year 5. For all of those finance experts out there, what would you do?

Under a separate scenario, if you didn't have to repay the $100k loan, how would you react differently?

Currently I am looking at Fannie Homestyle loans, traditional 20% down commercial loans, and small bank construction to perm loans. My goal is to leverage as much as possible while interest rates are still very low. Thank you in advance for your input!

John Dirgo Deweese · Answer

So basically you have a 100K loan with a balloon payment in 5 years?

It depends on your risk and confidence profile.

Safer would be to pick up a couple of places with standard loans (20% down or so), rehab them to create more equity and rent them with a plan to refinance when you need to pay off the loan.  Or maybe sell one to pay off the loan and hold the rest (depending on values in your area).

A bit riskier would be to speed this up -- buy with 20% down, rehab with the cash, refinance to get your cash back but hold the property and rent, lather, rinse, repeat.  After a couple of times, start holding back a portion of the refinance funds to pay back the loan -- early if possible.

Now this is one persons idea and based on what you said -- you can find properties that could be good rehab and rent but not rehab and flip. Use the cash stock as the revolving rehab fund.

Mike H. · Answer

You have to pay a 2.5% fee on a refi?

That is possibly the first time in my life I actually believe that the term "egregious" is an absolute perfect fit for describing something.

The may be the most functionally irresponsible policy I've ever heard of.

So if I refi my house for 200k, its going to cost me 5k in govt fees?

What is the govt doing getting involved in financing? Its one thing if the house is changes hands. But if you are just changing the terms of the loans, how in the world are they entitled to that size a fee?

There was a recent case in Ohio where the landlords contested some town's ability to do rental inspections and charge annual fees. And I think it went to the supreme court and the landlords won. I think the reasoning was based on a couple of things - unjust tax or something AND the fact that they were entering homes without a warrant.

I would have to believe there should be some kind of legal argument for limiting a govt's (in this case, the state's) right to charge excessive fees.  At the end of the day, why are they entitled to that kind of tax? No ownership change is occurring. Its just plan egregious!!!!!!

2.5%?????? I'd find some constitutional group and see if they'd be willing to fight that fight. If anything would seem to be unconstitutional, that should be it. :-)

Travis Lauchman · Answer

To all who've responded thus far, thank you! Your advice has been very helpful.

@John Dirgo Deweese I really like the idea of going with traditional 20% financing, paying for light renovation out of pocket, and doing a cash out re-fi after the unit is successfully rented. The goal would be to purchase so well that the 75% cash-out based on the ARV would cover the entire up-front spend including all closing costs). This way, given our market, we should be able to churn 4 or so deals a year while maintaining nearly the same stating capital of $100k after each re-fi. After 3 years we'll theoretically have 12 sky's the limit from there!

@Joshua D. thank you sir! I intend to start small and pick it up from there.

@Darren Eady I am definitely looking to have this money work for me passively. That is really the key - I want to learn how to mountain bike and speak spanish and then have the time to mountain bike the Andes. Gotta have a dream!

@Mike H. I have considered the hard money approach but for the time being am going to manage my risk until I feel fully confident in this strategy. I think the traditional re-fi route will accomplish everything I need it to while keeping risk minimal.

Just to provide further background, the $100k is being borrowed from a Gov't retirement fund that belongs to my parents and needs to be returned within 5 years... so I can't F it up!

And last point - the only concern that I have with refi'ing is that in MD (specifically Baltimore) we have to pay transfer and redecoration tax on re-fis to the tune of 2.5% for investment property. This is why I thought maybe going with commercial loan up front OR something like Fannie Mae Home Path may make sense. Anyway, thanks again all! I will let you know how everything turns out.

Mike H. · Answer

100k? But its all repayable after year 5? Thats the part that is very tricky. I don't know if you could do anything other than buy a house with cash, rehab it and then refi it.  The downside is you'll only be able to do one of these at a time. But it should limit your risk in case you can't get all your money back out.

Now. If I didn't have the issue of having to pay it all back after year 5 and its just about paying interest, then my advice would be very different - at least if my goal was to build a nice size rental portfolio with the money.

I would use that money as your low money down cash to buy SFH rentals using hard money loans.

If you have the experience flipping, you should be able to find hard money lenders that will do 100% of the purchase plus rehab provided you're at 70% ARV or better.

The only thing you would have to come out of pocket would be the points/closing costs. And thats what you'd use the 100k for.

Limit your deals to 6 to 10k out of pocket per deal and you should be able to add 10 houses in a matter of 2 to 3 years.

What you wouldn't be able to do is come up with 100k to pay off the loan when the balloon payment/payoff hits.

Darren Eady · Answer

I agree with @Travis Lauchman.  If you want to actively work this money, stick with your rehab flips since you know that business.  If you would like this money to work for you on a passive basis, buy performing mortgage notes.

Joshua D. · Answer

@Travis Lauchman

I would look at the brrrrr strategy closely if I were in your shoes. Buy something with your available capital, rehab it, rent it out, and then refinance it all out to better financing. At that point you can pay back the money you barrowed and do it again.

I would start small if possible. Prove to yourself that you are capable. Before you get crazy. Nothing more dangerous than an inexperienced investor with a lot of capital.

Best Strategy for Leveraging $150k?

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