Buy and hold Strategy - Does mine make sense?

[Klyde Waggsdale]

I am looking into purchasing a foreclosure to use as a rental unit, but cannot get an investment loan from a bank.

I have a hard money lender that is willing to lend me the money to purchase and rehab the house.

Here is the strategy with made up numbers:

1. Foreclosure listing price 80k. Home's value once fixed up 100k

2. Purchase the home at 60k with hard money lender. Include rehab costs of 10k in hard money loan. Total hard money loan of 70k at 15%.

3. Rehab home bringing value up to 100k

4. Refinance 100k property with traditional mortgage at 80% LTV (80k)

5. Payback hard money lender 70k principle plus 6 months interest of 5,250 for a total of 75k (rounded)

6. Now I have a home worth 100k with 25k of equity in it that should cash flow.

7. Find tenants

Please let me know if you see any flaws in my strategy. Thanks. :D

[Jon Holdman]

You'll more likely be limited to 75% when you do the refi. Possible to 70%, especially once you have four mortgaged properties.

The HML may require monthly payments.

There will be points in addition to the monthly interest. Those will come out of the loan amount.

You will have closing costs on both the initial hard money loan and on the refinance.

You will have expenses outside the loans including insurance, inspections, appraisals, and utilities.

So, lets do your deal and account for some of this.

Purchase price is $60K with $10K in rehab. ARV is $100K. The HML charges you 15% and four points. Initial closing costs are $2000. Points are $2800. Other costs (insurance, inspection, appraisal) are $1000. So, from the closing, you'll net $4200 after the initial costs. So, you'll need $5800 of your own cash to finish the rehab.

Then, you have to make monthly payments of $875. You may find a lender who will do this pretty quickly. But pretty quickly means you can start the process once you have it fixed up and leased, and it will take a minimum of 4-6 weeks to finish it. Six months is a reasonably safe lower bound. Eight is a possiblity if your lender wants six months seasoning to start the process. So, figure $875 for six months or a total of $5250.

You're up to just over $11,000 of your own money.

Now you refi. You get the $100K appraisal, your lender will go 75% LTV. You have about $3000 in costs and prepaids for the refi. So you can borrow $75,000, pay off the HML, pay the $3000 in costs, and have $2000 back in your pocket. You may be hard pressed to get the $2000 back, so a safer plan is to assume you can refi for just the loan payoff plus costs, or about $73,000.

So, you end up with a house, a $73K loan and you need $11K of your own cash.

If you want to do this with little or no cash out of pocket, you'll need to buy for more like $50K for this example.