Finding Funding for my First Rehab?

Question

Hello BiggerPockets family! I hope all is well in your investing journey! I am officially under contract on my first property that will become my first investment. I am going to BRRR/Live-in Flip/House hack this property. I know it sounds like a lot but I have a plan underway. I am a licensed contractor in the state of Michigan so remodels and rehabs are my strong suit. Now, enough about me and more about the property. Single family home under contract for 190k ARV is around 250-260K. This is a conservative estimate. The property will need apx. 20k to rehab. Here is my dilemma after down payment and closing costs I will not have the funds to rehab the property. I have the know-how and expertise to do most of the rehabs myself, as they are mostly cosmetic. As well as the ability to contract out work under my own license.

My question: What is the best way to raise the funds for this rehab? Understanding that this is more of a live-in flip than a standard flip?

Ideas? Thank You !

My question: What is the best way to raise the funds for this rehab? Understanding that this is more of a live-in flip than a standard flip?

Ideas? Thank You !

Michael Radney · Answer

@Daniel Young if it's ultimately a flip and you're confident that it'll sell once listed, I'd just pull a credit card cash advance. My go-to card's standard terms are 3 points and 2% minimum payment on the balance. So for $20,000 that'd cost me $600 to borrow it and the first payment due would be $412. The payments are all applied to principal. No other fees and the ACH deposit hits my account in about 3 days.

Personal loan would be my next choice but it'd be more expensive and take (slightly) longer to access.

Alex Breshears · Answer

Hi Daniel!

This is going to be a bit tricky from a lending perspective. If this will be a live in flip, that means it will be your primary residence, and DSCR and hard money lenders will not lend on a property that will be your primary residence. The regulations for owner occupied property are federally regulated, including required licensing and disclosures. Non-owner occupied property will be regulated by each individual state. This is such an important detail that lenders can have in their loan docs that if you move in, the loan will be in default.  So I will caution you on telling people it is investment property and then moving into it. That is only going to cause more problems than it solves.

You mentioned downpayment and closing costs, what loan programs are you considering. You could potentially do an FHA loan for a property, put down 3.5%, and then do the work as needed on the property while you live there. This has the advantage of being a primary residence with little out of pocket and a 30 year fixed rate loan. If you go to sell the property in a few years, the capital you get out of that transaction should be tax free since it was your primary residence. This would not be the case if it were investment property unless you decided to start a 1031 transaction.

Private money lenders also are equally not likely to lend on a primary residence. Also private lenders are not likely to loan money for the downpayment and rehab costs, as that situation is very problematic for the lender.

I just want to explain from a lender's standpoint why this might be above a lender's risk tolerance, so you can possibly find another alternative.  First, when borrowing funds for the downpayment, that means the property is 100% completely leveraged.  As the person providing that 2nd lien against the property, if that property loses value for ANY reason (and not all of them you control) that means my loan is automatically underwater being in the 2nd lien behind your financing to acquire the property.  If the property values in your market soften, if the tenant moves in and destroys it, fire, earthquakes, floods, hail, hurricane, another lock down requires you to keep a non-paying tenant - honestly anything - and my position in the property is at jeopardy. I'm not saying no one will do this type of loan, but I'm explain why looking at it from a lender's risk perspective could help you look for another alternative.

Another reason, other than being over leveraged, is that a borrower that is not well positioned with capital is also at a much higher risk of default. If a borrower stops paying on that first mortgage, and then the lender goes to foreclose, any equity that might have been had in the property is now gone because default interest, late payment penalties, legal fees, etc will eat up anything left after the principal balance of that first lien is paid. As the 2nd lien holder, again, I'm wiped out entirely. So again not a good place to be.  If you close on the property and then discover the roof is leaking, the main sewer line is nothing but tree roots, really any major expense, that can easily put a borrower in a position where they do not have enough actual cash to solve the problem, so the property loses value due to deferred maintenance, or the borrower digs themselves into more debt, making it even harder to get another loan to cash me out of the equation at that  upper 20% of equity.

Now what can possibly be done, with the properties you already own. If you have equity in the properties that are getting ready to sell, you could find a private lender that will do a 2nd lien on those, again as long as the equity is there. So for example if you are pretty far along in one rehab, and you have about 50% LTV with your current financing, you could potentially find a lender that will do a 25% LTV second, so your total LTV isn't above 75%. The 2nd lien holder position has a few considerations that need to be in place, such as it can't be a hard money lender, there can't be a large pre-payment penalty, it has to be current, etc. These types of loans I have seen done, and I've personally done a few in my chosen market.

I hope that helps!

Tom S. · Answer

@Daniel Young  If I'm reading it right, you only need to get funds for the rehab - $20k, correct?  In that case just use a credit card or get a personal loan and then pay it back off as soon as you can.

Daniel Young · Answer

I believe you may have misinterpreted what I was saying, this will be my primary residence and the house is under my name, not an llc. I apologize for any confusion this may have caused. I will be living in it while I remodel. I am looking for a way to fund the remodel while I live in it! Hope this helps!(:

Edwin Epperson · Answer

@Daniel Young I understand your position, but please consider what @Alex Breshears says.  She is a smart, and intelligent lender and investor.  I will comment that trying to deceive your lender that you will not live in the property is absolutely wrong, ethically, morally, and legally.  Every lender I know, that lends to investors requires multiple disclosures (ie legal documents) stating that you will not be living in the property, EVER, for the duration of the loan, and that the loan is B2B purpose only.  I do this for every one of my loans.  The way they will know, when you request a draw, for work completed they will find out.  Also Just because the property is owned in an LLC, does not negate this from being enforced.  Be careful about whose advice you consider.  Stick with Alex, she's the real deal.

Daniel Young · Answer

This is very helpful! Thank you for your response(: I am already working with a lender and this is my first property. SO unfortunately I cannot pull out from equity elsewhere. I am basically looking for a loan against this current home. With the attempt to pay is back overtime and once it sells. Something closer to a ballon payment.

Andrew Postell · Answer

@Daniel Young get with a lender.  If you need rehab there are plenty of low down payment, primary home, "rehab loans" that you can access.  Meaning, you can wrap the rehab into the loan itself.  I would certainly get with some lenders in your market right away to help with this.

Eliott Elias · Answer

Concept doesn’t change, if this property is in your LLC and you aren’t planning on living in it for more than a few months I’d go the hard money route. They won’t like that you live in it, I wouldn’t mention it to the lender

Finding Funding for my First Rehab?

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