Best way to finance renos?

Question

Hi everybody,

I just got my first duplex under contract and will be financing it FHA 3.5% owner occupied, so a little good old fashioned house hacking. I have got all the cash I need for the down payment, all closing costs and everything that goes with that, and then probably another 8K-10K for renovations. The property needs a fair bit of work both inside and out, but nothing major (all mechanicals are within 2 years new thankfully). We would like to fully finish the basement on our side of the duplex and "partial" finish the basement on the occupied side. The super nice thing is that both sides are fully plumbed for a bathroom and are completely dry walled, the occupied side even has a fully finished BEDROOM that isn't being counted because they don't have an egress window down there!

Anyways - I have estimated the rehab to cost around 20K-22K when all said and done so I was wondering, what is the best way to finance that extra, lets say, 12K? Should I get a construction loan... or just make my home loan 12K more than what I bought it for and use that (if this is even possible?).... or some other more creative way all together?

I would love to know what you all think, and how you have done it yourself in the past. Thanks so much!

Bob Okenwa · Answer

@Tyler Jordison

You should consider the FHA 203k loan. They will give you money for the rehab and wrap that money into the loan.

Or a longer shot would be to use 0% credit cards and fund the rehab that way, but make sure you'd have a plan to pay that off before the interest kicks in.

Derek Dombeck · Answer

You will not be able to add 12k to your purchase money loan. If you take the cash you have to improve 1 side 1st, this may raise the property value enough to refinance in 6 months. If you have great credit and good income, you could borrow money on a personal loan, remodel the whole building to increase value, and then refinance to pay off the personal loan. This is dangerous to the degree that the personal loan negatively affects your credit and household debt to income ratio. I have no way of knowing how good of a deal you are getting, but if its got  equity over and above the 3 1/2 % you are putting down, you could find a private lender to borrow from. (this is not very likely because of your lack of experience and high LTV) This lender would be in a 2nd lien position and not very secure if you fail.

You could also sell an option to an investor for cash. This can be great for someones IRA. If they give you 12k for the right to own 10 % of the equity ( this is all negotiable ) at a future date, their IRA does not incur the liability of owning R E within it. The IRA would exercise the option when you sell or refinance, making a potentially nice return.

Happy Investing

Derek Dombeck

Tyler Jordison · Answer

@Derek Dombeck Thanks for the great insight and multiple options. I think taking what I have to finish the 1 side 1st and refinancing in 6 months is a really solid option. In this senario I would be able to refi out my monthly PMI sooner as well, two birds one stone.

@Bob Okenwa Thanks for the response Bob, I have heard of many other investors utilize 0% credit cards effectively for rehabs, and I do like that idea, I just have to make sure I have a solid plan to pay them off, like you said. I will have to look into the FHA 203K loan as well, thanks again!