Reno started, how do I pay for it?

Question

I’ll start by saying I’m new to investing. I purchased my first deal after reading rich dad poor dad and listening to the BP podcast constantly for the last year or so.

I purchased a home in October in southeastern Michigan and am now about 6 weeks into a rehab I’m completing myself as I’m a licensed builder. My intentions are to rent the property. Purchase price $116,500 (5% down conventional), reno budget of $30,000 putting me all in at $146,500. Expected ARV is $155k-160k. I used the cash I had available for a down payment and closing costs but wanted to stay out of my own pocket as much as possible.

As I’m learning more about the refinance process I’m understanding I’ll need to leave at least 20% in and will not be able to use the refinance to pay off the credit cards (0% APR for 12 and 14 months) I have been using to finance construction. Additionally, I plan to take the renovation a little further to minimize future maintenance issues and will need additional funds (10k) beyond the amount I would have been comfortable spending on the 2 credit cards to finish up the project.

I’m hoping someone will have a recommendation (construction loan possible?) on how to finance the construction retroactively so I can get my full budget and pay down the credit cards in the next 10 months. Looking forward to hearing your thoughts!

Jim D. · Answer

If you aren't able to find a good solution for refinancing a rehab, you always have the backup exit of just flipping it when you're done. Might not make much profit, but if you don't have any other option besides having high interest credit cards, it will at least get you out so you can move on to the next one.

Val Hill · Answer

Hey Sean! I just ran into the same issue myself - found a great deal on a student housing rental but in doing my research I realized the restrictions around the cash-out refi and decided not to go through with the deal after all. The lesson I learned is although it may be a great deal, it might not be a great deal for me (as a new investor with very little capital). I’ve decided to do a few flips first so I can build up some capital before starting my rental portfolio. Sounds like you might want to consider doing the same. Good luck on your rehab & the rest of your investments!

Sean Kelly · Answer

@John Powell Hi John, I’m trying to be cautious on not over estimating my ARV so you may be on to something. I did see a couple recent sales in the 165k range with the only difference being a basement. Fingers crossed on that but I am trying to prepare for the worst case. When I purchased the house it was appraised as is and met the offer I was making. This home is 820sf, appraisal is 142/sf. Average sf price in the zip code is 190 which would get me to 156k. I have done just about everything from all new electric to opening up the kitchen, new floors, HVAC updates, etc. Thanks for taking the time to weigh in!

Sean Kelly · Answer

@Matt Hurley Hi Matt, thank you for the input. I do have rental comps of 1450-1500 I was provided by two realtors. My taxes insurance and mortgage come out to $840 a month currently. In this area, I knew my sweat equity wouldn’t go too far but felt good about the monthly rental income. Unfortunately, I didn’t know the requirement to leave 20% in as you mentioned so yes - lesson learned for the next one.

John Powell · Answer

Yeah I agree with Matt I think from what you are saying you may have overpaid or are underestimating the ARV. But it sounds like you have good credit and can get some 0% CC money for a while while you finish and get it rented. Use all of the cashflow from rent to pay down the CCs. this might have been a $10K lesson. Did you have an appraisal done when you bought the house? If so what was the value? was the appraisal contingent on repairs that you are doing or was it an as is appraisal? once you near completion you will want a competent realtor to give you a CMA to show what other rehabbed houses in the area are selling for. It may be that you added more value than you expected. I did this on a house not too long ago and the value was 20K more than I had planned for on a similar sized deal.

Matt Hurley · Answer

You are going to run into similar problems with a construction loan. Most will not finance a property with those numbers, standard for most lenders is: purchase price + rehab = 75%-80% of ARV. Similar to most cash out refi's, they usually won't give you more than 80% ARV. Not trying to be negative, but there's not a ton of ways to get out of this that don't involve cutting your losses right now before getting any deeper, or bringing on a partner who will help finance the construction in exchange for equity in the house/company. The other option is to just accept that you'll walk out of this with debt (consider that the "down payment"), and use all profits from the rental (after variable landlord expenses) to pay off the credit cards over the first couple years of ownership. Do you have rental comps? How much are you going to be profiting when reno's complete and rented out?

Reno started, how do I pay for it?

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