I have equity but no cash to rehab. How can I move forward?

Question

BP Fam! I have a property with over $80K in equity. I would like to rehab the property. Rent it out and refinance. The mortgage balance is $26K (-/+). The rehab + landscaping = $65K (approximately)

Would it be better to seek out private money and pay them back at refi or attempt a cash out refi. This will be my very 1st rental opportunity. I do have a holding LLC and an LLC within. I have tried to get business funding but I'm facing such a run-a-round with that. I have been in the real estate community for some time now and feel as though I should just know what to do and how. But unfortunately, I feel stuck. How do I proceed forward with little to no funds? I hear people all over talking about how this is possible. Can someone please shine some light and direction?

Extremely Grateful!

Nate Herndon · Answer

I would check with your local bank for opportunities to get a line of credit - I wish those things existed in the private lending world, but they are non-existent for the time being. You may also be able to connect with a local hard money lender to fund your rehab.

For my clients who have exhausted those options, I recommend pursuing a refinance-rehab loan that could give you some cash-out to get started, while also funding your whole budget to be held in escrow. With say $20k in cash-out, and $65k held in escrow, you could recycle that $20k three times over by completing work, ordering a draw from your rehab loan, and receive those reimbursed funds for completed work in 3-5 business days.

I walk through the whole BRRRR process with clients via purchase-rehab (or refi-rehab) loans, and then DSCR refinances once work is complete. The minimum loan amount on both of those loan programs is $50,000.

You would want to avoid a DSCR refinance right now for cash-out as those loan programs will carry prepayment penalties - refinancing post-rehab to get your equity back out of the property (based on improved value) would leave you paying an extra prepay penalty. So, a line of credit or bridge/rehab loan will best serve your BRRRR goals, as those do not carry prepayment penalties or minimum hold times.

Rick Bassett · Answer

@Gerard Scranton - we have gone the partner route in similar situations in the past by giving an equity stake in exchange for cash and labor.

I would find the nastiest houses in need of work and put up 50% of the combined purchase price and rehab cost and then I’d bring in a contractor partner to bring in the other 50%. We would both do some of the work and hire the rest. It worked out very well.

All were buy & holds, all cash flowed well, all have at least doubled in value.

Dylan M. Davis · Answer

Most likely a cash-out refinance won't be possible unless the loan amount is above 100k and the property is currently seasoned and rented.  If the property needs capital improvements and as it stands is worth over 125k I could see a lender potentially issuing a rehab holdback against the ARV.. These funds would be drawn down as work is completed but landscaping wouldn't necessarily be included.

As well most lenders won't do anything under 100k.. So most likely you'd have to come out of pocket or find a partner that wants in on the deal to provide the liquidity.

Ko Kashiwagi · Answer

Hi Gerald,

As you may have encountered, options for short term bridge for less than 100k is limited. With that being said, it is out there and private financing is also available. The key would be to properly line up a plan (Scope of work, contractor, exit numbers)!

Chris Seveney · Answer

@Gerard Scranton

Private lender probably best option and a few additional comments

1. Your corporate structure is too complex. Holding LLC and another for real estate is really no needed (note not an attorney but an investor who has been around)

2. Business finance - don’t pay someone to tell you this is a thing. Investment companies don’t get business financing - it’s for operating companies like restaurants etc. If you were a construction company then yes or maybe a property manager - but just an Investor don’t waste your time

3. If mortgage is 26k and property worth $110k then most you could get is around 40-50k.

One thing you didn’t mention is what is arv after renovation?

Gerard Scranton · Answer

Thank you all for your feedback! Really appreciate it.

The ARV is $130K. I have 2 very strong comps in my area that were sold in May 24'.

You guys are absolutely right about the DSCR and penalties they may carry. Great point to consider.

Average rent in this area for a 2/1 is $900-$1200. This house is currently a 2/1 but with the additional 480 sqft of living space (main bath, dinning, walk-in closet). From 990 sqft to 1470 sqft. Should definitely add great equity to the property.

@Nate Herndon I really like this approach and would like to connect with you to discuss further.

Drew Sygit · Answer

@Gerard Scranton without the current value and ARV, we're all flying a bit blind and guessing!

We can try to estimate the 1st number though, based upon what you've shared - $80k equity + $26k loan balance = $106k current value.

You want to spend $65k more, so adding that to current $26k loan = new loan $91k

$91k / $106k current value => 86% Loan-To-Value

No lender's going to touch that!

Your ARV will need to be at least $122k for this to work.

Will the projected rents support the payment on the $91k mortgage + property taxes + insurance (called PITI)?

This is all pretty basic stuff, that you can read about here on BP if you spend a bit of time looking.

So, tough question for you - how are you going to succeed at RE investing, if you keep putting in little to no effort on research and just ask strangers for help?

Hope you take that question as the inspiration it was intended to be:(

Greg Cavaioli · Answer

Hey Gerard,

I have started working at a Private/Hard Lender and you seem to have a suitable circumstance to chat. If you are interested, I can provide you with more information.

Whatever you decide to do, best of luck!

Connor Hibbs · Answer

Hi Gerard, how much is the property currently worth? It may be worth taking out a cash-out rehab loan then refinancing it afterwards into a DSCR. I'd recommend not taking a max cash-out if it's not needed, but to take out what you need +10% to give yourself some breathing room.

I have equity but no cash to rehab. How can I move forward?

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