Buying from wholesaler, rehab, rent rooms, refinace

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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Buying from wholesaler, rehab, rent rooms, refinace

Andres Ayala
Austin, TX · Member since 2020 · 19 posts · 1 vote

Hello all,

This would be my first flip/first time investing. I live in Austin, TX and wanted to house hack to try to have most of my mortgage covered while living in a house. The market is very competitive, rising and expensive. I realized in order to make house hacking a possibility this would be my best bet to make the numbers work.

Buying a property from a wholesaler, rehabbing the property, and rent out some of the rooms. Or same with a duplex, rent one side and live on the other.

I am looking for some advice from the community, if this is a good idea or am I getting myself into a tough situation?

I also was wondering, after I complete the rehab and hopefully refinance the home, I pay the hard money lender back for the initial loan and get a fixed mortgage for 30 years. Is there any way I could calculate the mortgage after the rehab, does having equity in the property bring down the mortgage? I would also like to plan for vacancies and if I decide after a while to live there myself full time or rent the property entirely and do it all over again.

Any advice would be greatly appreciated! I do have some estimates on the prices I would like to get!

Estimated house purchase price: $240,000-$260,000

Estimated rehab: $30,000-$40,000

Estimated ARV: $340,000-$370,000

Thanks again!

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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
6y

@Andres Ayala and @Kristin Feerst thank you very much for posting on this subject.  This is a common area for first time buyers to ask about and I am going to recommend against this....but in a good way.

When we buy an investment property from a wholesaler....that property might be anywhere.  Maybe it's over here...or over there...or in some neighborhood that I don't like...or whatever.  And then, as Kristin mentioned, your lending options are limited.  Usually your "aquisition loan" is pretty high interest rate (hard money is ONE type of acquisition money) and then you'll have to refinance, but you can't refinance all the way.  And you just had to pay closing costs twice and your rate is higher and you came out of pocket all this money blah blah blah.  And all of those things might be fine...IF I DIDN'T HAVE TO LIVE THERE.  As an investment property...we look for things that make sense, like numbers, to make a deal seem worth it.

Now, let's change hats - my PRIMARY home.  Since I'm living in this house I need it to fit my needs.  Maybe my needs are that I have a reasonable commute to work.  Maybe my need is that I need a safe environment for my family.  Maybe my need is that I need a specific school zone.  Maybe my need is that I want a specific layout since I'm going to be house hacking. Maybe my need is NONE of those....but it's some other need that Andrew can't think of.  Your PRIMARY home will have PERSONAL needs.  Some of those needs will not have a monetary value to them.

Now, let's go to the loan part of PRIMARY homes - you get the best rate!  And the lowest down payment!  WAY better than any investor loan.  Oh, and you have renovation loans at your disposal too....and they are better than any investor renovation loan!  You already have the best loan that every investor WISHES they could have.  And all you have to do is just buy the house that fits your need....well, that and get qualified for the loan that is.  I guess that is a big step, must make sure you get prequalified.

The point here is that you can choose a property that fits your PERSONAL need and also get the BEST loan you can find.  It's a win win!

I hope this makes sense what I am describing here but just think about purchasing a home in the traditional fashion if it's your primary home.  Hit us back if you have any questions.  Thanks!

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  • Kristin Feerst
    Merchantville, NJ · Member since 2019 · 39 posts · 32 votes
    6y

    I'm literally about to do the same thing as a first timer, except in a very different market.  I asked a lot of seasoned investors and the general sentiment was a good wholesale deal is legit and can save you time and money driving for dollars, sending out fliers, etc. etc.  And in a competitive market you are going to be out there competing against seasoned wholesalers every day.

    Of course not all wholesalers are created equal.  Perform due diligence.  Make sure they are getting the title free and clear.  It's better to deal with a reputable larger firm vs. mom and pop shop to ensure they are doing everything on the up and up and someone isn't going to lay claim to your property in 3 months from now (like a divorced spouse...I've seen it happen)

    People's opinions are going to vary on the hard money.  Definitely factor the interest payments for the time between acquisition and refi into your calculations.  You will likely be paying $5-10k in interest.  

    You will probably get refi terms of 70-75% ARV.

    Make sure you have a good contractor (my current biggest challenge). Obviously the longer the rehab takes the longer you are making those big interest payments on the hard money loan. Make sure you have cash reserves. 

    Good luck.

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    6y

    @Andres Ayala and @Kristin Feerst thank you very much for posting on this subject.  This is a common area for first time buyers to ask about and I am going to recommend against this....but in a good way.

    When we buy an investment property from a wholesaler....that property might be anywhere.  Maybe it's over here...or over there...or in some neighborhood that I don't like...or whatever.  And then, as Kristin mentioned, your lending options are limited.  Usually your "aquisition loan" is pretty high interest rate (hard money is ONE type of acquisition money) and then you'll have to refinance, but you can't refinance all the way.  And you just had to pay closing costs twice and your rate is higher and you came out of pocket all this money blah blah blah.  And all of those things might be fine...IF I DIDN'T HAVE TO LIVE THERE.  As an investment property...we look for things that make sense, like numbers, to make a deal seem worth it.

    Now, let's change hats - my PRIMARY home.  Since I'm living in this house I need it to fit my needs.  Maybe my needs are that I have a reasonable commute to work.  Maybe my need is that I need a safe environment for my family.  Maybe my need is that I need a specific school zone.  Maybe my need is that I want a specific layout since I'm going to be house hacking. Maybe my need is NONE of those....but it's some other need that Andrew can't think of.  Your PRIMARY home will have PERSONAL needs.  Some of those needs will not have a monetary value to them.

    Now, let's go to the loan part of PRIMARY homes - you get the best rate!  And the lowest down payment!  WAY better than any investor loan.  Oh, and you have renovation loans at your disposal too....and they are better than any investor renovation loan!  You already have the best loan that every investor WISHES they could have.  And all you have to do is just buy the house that fits your need....well, that and get qualified for the loan that is.  I guess that is a big step, must make sure you get prequalified.

    The point here is that you can choose a property that fits your PERSONAL need and also get the BEST loan you can find.  It's a win win!

    I hope this makes sense what I am describing here but just think about purchasing a home in the traditional fashion if it's your primary home.  Hit us back if you have any questions.  Thanks!

    2Reply
  • Kristin Feerst
    Merchantville, NJ · Member since 2019 · 39 posts · 32 votes
    6y

    Oh I somehow COMPLETELY missed that @Andres Ayala wants to house hack. I thought were just discussing wholesaling and hard money as a route for BRRR....my mistake

    @Andrew Postell 100% agree, for house hacking I would not go this route. I'd just do conventional financing on a property in a location I want to live in that works for hacking such as a duplex or a place with an in-law suite.  

    You have to pay to live somewhere.  You don't have to be so aggressive on finding a deal since your roommate will be paying a big chunk of your mortgage, maybe all of it!

    My wholesale deal is in a place I would definitely not live...

     undefined

    1Reply
  • Andres Ayala
    OP
    Austin, TX · Member since 2020 · 19 posts · 1 vote
    6y

    @Kristin Feerst @Andrew Postell Thank you for yall's feedback! 

    The issue that I have in Austin is that every house is above $320,000 and duplexes about $450,000 and they are not even close to being updated. I can't make the numbers work with almost any property if I have roomates or if I live on the roof. In this case, the wholesaler is a friend of mine and is looking for an area where they are going to bring developments that will bring 10,000 people or something like that, i am thinking renting will be much easier a year and i could rent out the whole house and live somewhere else. All the houses listed on the MLS are above $320K. If he is helping me find a house at $240,000, giving me his trusted contact for hard money (said he will probably give me 10% with 2pts) for the time I rehab it. All the houses that I have seen in the area are not terrible. Mostly cosmetic updates and i am assuming maybe tearing one wall to open up the space. I am in no rush and will not invest in something that needs extensive foundation/roof/electrical work. I have a contractor that my friend who is a licensed architect uses all the time. I plan on using him for some work and things like laying tile/painting i have experience with and will do myself. I am willing to adjust to whatever house I end up investing in, I have nothing holding me back and am willing to sacrifice comfort to make the numbers work. I am just struggling to understand the refinancing option after the rehab.

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    6y

    @Andres Ayala when you say "you can't make numbers work"...what do you mean exactly?

    0Reply
  • Andres Ayala
    OP
    Austin, TX · Member since 2020 · 19 posts · 1 vote
    6y

    @Andrew Postell Sorry, trying to house hack, having rented out rooms to get close to covering my mortgage. I’m assuming for a 350,000 house the mortgage will be 2,400 approx. I don’t think I can get away with renting two rooms for 1,200 each or make it work.

    That’s why I am trying to get a cheaper deal with a wholesaler and fix the property then charge rent and hold the property because I know it will go up in value over time with the new developments.

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    6y

    @Andres Ayala ok, so it is NOT realistic to have your rents cover your entire mortgage.  Especially if its a duplex...you are living in 1/2 of your income producing property in that scenario.  Once you move out, then it will cash flow excellently. 

    And certainly if you are targetting specific neighborhoods and areas I would still encourage you to examine the cost difference in purchasing a primary home vs. using hard money with holding costs and refinance costs.  Especially if you are considering a duplex.  Certainly hope it all works out!

    0Reply
  • Andres Ayala
    OP
    Austin, TX · Member since 2020 · 19 posts · 1 vote
    6y

    @Andrew Postell

    Correct. Yeah I am struggling to find a way to make things work but I am trying! And with a primary home the price is going to be $350,000 just about plus any other repairs/changes I want to make. So that seems tough. The total all in price for the wholesale should be about $300,000 and with an appraisal and refinance I’m hoping it will be at $350-$370,000. But that’s the part I am nervous about, because I am unsure of how it works and what my mortgage will be after.

    0Reply
  • Kristin Feerst
    Merchantville, NJ · Member since 2019 · 39 posts · 32 votes
    6y

    What about trying to find a foreclosure?  

    Are there basements in Austin?  Can you live in the finished basement and rent out all three rooms?  

    What about short term rentals vs. long term?  You may get way more $$ per room with an Airbnb model.

    Is there a garage?  Rent that out to for additional $$

    Just trying to be creative...

    What is a fair per room rent in Austin?  Maybe not $1200, but I could easily see $700-900 per room with those housing prices.  So that would cover $1800 or a $2400 mortgage, which is pretty great.  Obviously you want to rent the master and live in the smallest bedroom for max rent potential.  Is the ultimate goal boost savings rate to raise capital more quickly to fund additional deals?  You can do radical lifestyle reductions in parallel with house hacking to drastically increase your savings rate even if you are still paying a mortgage.  Plus don't forget you get to write off mortgage interest on the home. 

    Good luck, I had no idea Austin was so expensive!

    0Reply
  • Ryan KellyBusiness Member
    Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
    6y

    @Kristin Feerst I think you are going to have difficulty purchasing the property wholesale as you will likely need hard money for the purchase plus $40-$80k on average to fix them up. Plus, once you eventually refinance the home to a conventional loan it will likely appraise at the levels you state are too high for “your numbers” around $350k plus. You are basically adding a step that isn’t necessary. Remember a house hack is your primary home and you should expect you will carry some of the costs, but you also have the most flexible lending options PLUS tax benefits like a homestead exemption and no capital gains on up to $250k if you sell. If your roommates can cover 60-75% of the Mortgage, taxes, and insurance, that’s a home run for you.

    [email protected]512-674-5478
    Ryan Kelly Group - Keller Williams5110 Reviews
    WebsiteView Page
    1Reply
  • Ryan KellyBusiness Member
    Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
    6y

    I meant my response for Andres

    [email protected]512-674-5478
    Ryan Kelly Group - Keller Williams5110 Reviews
    WebsiteView Page
    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    6y

    @Andres Ayala I would HIGHLY recommend for you to get prequalified with both a HML and a Refinance lender right away. Ask your HML if you will occupy the property if they can lend on it. If you don't have all the blanks completed it is hard to analyze the numbers. I think once you do that you will see just buying outright will be a heck of a lot simpler, easier, better choices in homes, etc. for you. Maybe not. But get prequalified right away so you know what your mortgages will look like after.

    0Reply
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