Should I borrow money for renovation on a purchase rental?

Question

Hi My BP family,

I'm on a 90 days challenge to buy an investment rental property. I am currently in the process of buying a duplex that should be closed by end of November. Since this is my first time, help me with this question:

The purchase price is $100k with a 25% down. I only have the down payment available. I don't have any available cash for renovation. I want to do some works on the property in other to raise cap rate. How can I go about finding the money to renovation if I don't have any more cash?

Thank you.

Harrison Smith · Answer

@Watson Josue Congrats on taking on the 90 day challenge and taking action.

@Mark Wurtemberg offered up a few good options (outside investor, 0% credit card, and 401(k)). Another option would be a HELOC on a primary residence (if you own) or a LOC secured by an investment account or other asset. Hard Money could be a potential last resort, but only if you can refinance that loan in the short term since the cost is high and term is generally short.

Whatever path you choose, best of luck on your investment.

Watson Josue · Answer

Thank you Harrison. Would $230 cash flow with a CoC of 9.36% on a duplex is good? I know after improving the property I will be able to raise cap rate.

Thank you for your reply.

Watson Josue · Answer

Thank you Mark. That makes sense.

Mark Wurtemberg · Answer

@Watson Josue Congrats on the deal.

Do you need to renovate right away? If you can wait, then I would suggest building some reserves from the cash flow (assuming it will cash flow right away) even if the cap rate is lower.

If you can't wait, then I would suggest the following:

1. Pull in an investor. (Parents, friends, fellow BP member) Offer 8% or so.

2. Credit Card (Ideally zero percent offers you may receive in the mail. Being careful to understand the terms to pay back in time to avoid interest.)

3. Borrow against 401(k) if you have one with employer. (There is a fee, plus interest, usually 4%, depends on employer, that is occurred while you have the loan and it must be paid back in a year or so and before you resign from your employer)