Good ARV Opportunity - Looking at Financing Options, Limited Cash

[Leah Burns]

Hi BiggerPockets Community!

My husband and I purchased his mom's house in October 2020 for $189K with a VA loan. We were not very educated about real estate investing at the time and we started renting it for some passive income in Dec of 2021 after some minor renovations (bedrooms, bathroom). The estimated value on the house is currently $260K "as is" but we want to finish the basement and add a half bath, which we are estimating would bring our ARV to $300K (after looking at comps in the area). We don’t have a ton of cash on hand for the renovations (est. $30K) and our credit isn’t stellar - our bank told us a HELOC is not a viable option and recommended a cash out refi. Would it make sense to do a Cashout-Refi now to cover repair costs and then try to do another Refi on ARV later? What would our best bet be for creative financing?

Any advice is appreciated – we are a young team hoping to start off real estate investing on the right foot. We both have learned SO much over the last 6 months listening to BP and being apart of this group. We have a good opportunity on our hands and want to do it right. If you've made it this far... well, thank you!

[Erik Browning]

As a lender, I recommend you stay put @Leah Burns - here's why.

1. You mentioned your credit is not great. Instead of repairing the house (that already has a tenant in place), repair your credit. Work on your debts, dispute past delinquencies, and get yourself to a 740. 

2. Save up your cash. You will need this cash for future purchases and closing costs (even if you use VA again, you'll need to pay an EMD). Keep this on hand for when the next opportunity arises and learn more about investing

3. Since you guys used your VA loan, you have a major advantage now that you have a tenant in your property. PLEASE make sure your taxes (on your Schedule E) show that you've been renting this out. Lenders will look at your Schedule E to determine (VA loans) if you have experience as a landlord. If you have 2 years of experience as a landlord using a VA loan, you can use the existing leases as income on multifamily properties to help qualify you for the loan. Conventional loans require 1 year.

4. Feel free to drop by the house and make some inexpensive repairs on your weekends. Learn to be a landlord and deal with collecting rents, handling issues, and being comfortable with the process.

5. It probably doens't make sense to refinance. You likely have a killer rate from 2020. Refinancing right now will not only raise your principal, but there's a good chance you will be in the mid-5's to mid-6's. Keep your cash, keep your low monthly payment, wait to access the equity when you are in a better financial position.