Best financing options for doing BRRRR on low value homes?

Question

I am looking into investing in a single family home that would be under $40k which I would buy in cash in an area where this can rent for  approximately $800 a month. I intend to do this for more than one house over time but ideally would start with one house. It wouldn't be much of a rehab, rather just fixing whatever needs to be fixed (maybe a new AC unit, heater, things like that), cosmetic improvements (probably new paint, maybe carpet, etc) so this wouldn't significantly raise the value of the house above the purchase price.

I would then want to do a cash our refi to get at least some of the money out (maybe as low as 50% even would be worthwhile for me or as high as 80%). I would then be holding the house longterm for rental income. My understanding is that this isn't exactly an attractive loan to most banks / credit unions so I have been researching a bit about real estate investment bankers and am wondering if this is likely my best option or would it be worth trying to talk to some local banks or credit unions? My concern around this is that I wouldn't be living in the area, although I will be out there sometimes so I could meet with them in person with no issues but I still wouldn't be a full-time resident of the area. Any advice is greatly appreciated.

Jaron Walling · Answer

@James Elden At these numbers I'd strongly consider going PM. You could continue searching for banks and credit unions but I wouldn't waste my time. Someone around you has to be willing to lend you $40K. Hopefully you have the cash to complete the rehab.

The issue here is the ARV. Better research that number really well before you start making offers and buying property. It ways heavy on a future appraisal and refinance to conventional loan.

Jason Shackleton · Answer

Hey @James Elden one private money lender I have connection to will go as low as $50,000 for the loan amount. I don't personally know of any lender currently that can go lower than that however.

Good Luck!

Kevin Romines · Answer

Hard money can be a good solution, however it is the long term financing that is the question regarding the low loan amounts. The hard money that I work with, also has long term financing available at some great rates, however 99% of hard money doesn't have those options available.

You must nail down your long term financing 1st before you do anything. Then proceed with whatever method you will buy and rehab the properties secondly.

I keep saying it, and I'll say it again, it is a credit union that you are most likely to find the long term financing. Ask the question of any hard money that you talk to, however expect to find that they don't have long term options with the vast majority of hard money.

Chris Teti · Answer

@James Elden I think I would probably secure some business capital (business lines of credit) and then connect with a good HML that can do a portfolio loan on a group at a time as one individually would be too low.

Jason Shackleton · Answer

@James Elden that is a good question. The lender I am considering does do portfolio loans. Would they look at your volume and add it up to an amount they would lend on? very possibly. We would have to take a further look at the deals etc. They also have a unique LOC option that could work for you if you meet that criteria.

James Elden · Answer

@Kevin Romines thanks, from some research my understanding is that I would need a non-QM loan or some credit unions could do a regular QM loan for this amount?

James Elden · Answer

@Jason Shackleton ok thanks, I have come across one lender so far also who had this as their lowest amount, interesting. One other question that this led me to have is would something like a portfolio loan ever be an option if, for example, I bought 2 or 3 $40k houses so the total value of the three of them combined was over $100k? This may be a possibility for me as well. Thanks.

Kevin Romines · Answer

Other than private money, you may find a credit union that is willing to do these low loan amounts. Banks, Bankers, and Brokers cant do these deals because of the limits that are put on them through regulations. The regs say that the most a lender can charge is 5% on these deals for part of the closing costs. 5% would be $2000 dollars, so they cant get all the closing costs in these deals with that small amount that can be charged.

Credit unions are regulated differently and can do deals of this nature, however some wont do it as it is non-profitable from the time spent on the deal versus what they make. Some will do it. So call all the credit unions in your area and see who will and who wont?

I hope this helps?

James Elden · Answer

@Jaron Walling ok thanks I will look more into private money lenders. In my case, the house may be livable when I buy it, so I wouldn't be putting that much money into it or raising the ARV by much, I do have cash reserves to complete any repairs that would be needed though. The house value would likely never rise much above $40,000, I'm buying this purely for long-term rental income, so per my understanding a conventional refi may never be possible unless I'm misunderstanding something. The houses I'm looking at are ones that have never really had a history of appreciation.