No Money Down Rehab and Hold

[Paul Tschetter]

Since hearing on a recent podcast and after a friend encouraged me to share, I thought I would share 1 of my success stories from earlier this year.

I purchased a single family house with a guest house on about 1 acre of land in my area (Island County Washington). It was a (reverse mortgage) foreclosure I found on the MLS but I had been tracking the house for 24 months so I knew it would be available at some point. I purchased the property for $160,000 (there was a higher offer from another buyer but my track record help me convince the seller to go with my all cash offer). I knew that with some cosmetic fixes the property should appraise for $300,000 so the idea was to buy (with hard money), rehab, refinance and then hold as a rental.

My hard money lender trusts me and saw the value in the deal so he not only put up the money to buy the house but he put up the rehab money as well.  I did have to give him a lien against a separate lot that I own outright that is worth about $50,000 just so I had some skin in the game but I was able to do this without using any cash.  Pretty cool. 

So we closed on the property, I rehabbed the place and rented it out in about 3 months (gross rent is $2,350).  I also knew that if the appraisal came back low, I could sell the property for $300,000 for a quick sale.  I like having more than 1 exit strategy.

So about 4 months after closing, we went to refinance and the appraisal came back at $325,000.  I owed the hard money lender $210,000 so we put about a $210,000 loan on the property and paid off the hard money lender.  The loan to value ratio needed to be 80% so we were well below that number (about 65%).  I cold have even pulled some cash out of this property but I wanted to be a little more conservative making sure my rental rate supported the loan amount.

Now I have a 2 unit rental with just over $100,000 in equity that cash flows a few hundred bucks and again I did not have to come up with any cash to do this deal.