How would you do this deal

[Pat Jackson]

I've found a 2 bed, 1 bath house. ~1,100 square feet, on a small lot in the midwest. My goal is to buy and hold this property, and BRRR it after I'm on title 6 months and it's seasoned.

Can be acquired for ~$20,000 (REO)

Needs ~$25,000 (on the high end)

Can be sold as is for $40,000

Will appraise for $75-80,000

Will rent for $700 a month

Assuming my numbers are right, get ~$60-64,000 back at cash out refi.

Which options would you choose:

1. Do the whole thing cash.

2. Buy the house with a conventional mortgage, a 5% interest rate, and ~$2,000 in closing fees.  (I called a local bank, this is an option).  Then pay for the rehab cash.

3. Do the whole thing through finance.  I posted elsewhere terms I can get through a local portfolio lender:

85% of purchase price

90% of rehab cost

12.5% interest and 2 points, 10.5% interest and 3 points.  Minimum 3 months interest.  Also have to pay ~$3,000 in fees.

4. Buy the house with my HELOC (6% interest), and pay cash for the rehab.

I'm leaning towards option 1, 2, or 4. Most of my cash would be tied up in the house with option 1. Closing costs would be a big downfall to option 2. Option 3 just seems expensive but I'd get experience and "prove" myself with the lender. Option 4 seems like the best bet, I'd have the most cushion if something went wrong, there are no fees with the HELOC, and 6 months of 6% interest wouldn't be terrible.

Thoughts?  Suggestions.  Is there an option 5?

[Jeff Petsche]

@Pat Jackson Sounds like you have multiple things to consider on this property and it really depends on what your strategy is for other deals that come your way. I personally don't want to tie up my cash on one house, unless it's short term and I can REFI quickly and get it back to go onto the next opportunity.

If you have the ability to leverage other money to purchase/rehab and then REFI, I'd go for that route over using your own cash. However, if you have the cash, have no other options and it looks like a great deal, I'd figure it out and make it work.

If it was my deal, I'd go for the following approach FIRST and if I couldn't make it work, go to plan B:

Hard money loan at 90% of acquisition and 100% of REHAB. 10% of my own money for down payment + CC.

REFI with a local bank/credit union that doesn't require seasoning at 80% of ARV.

In this scenario, if the ARV is $80,000, you should be able to get a bank to loan you $64,000 (80% of $80,000). That $64,000 would pay back the hard money lender ($20,000 acquisition, the $25,000 rehab, the hard money fees/interest), still cover the REFI closing costs and you walk with cash in your pocket and have a performing asset that cash flows and in the end you have none of your own money into the deal.

Am I missing something?

I know a guy in Minnesota who did this exact strategy with a duplex.

He purchased it for $50,000 and put $15,000 into REHAB. The ARV was $100,000. He purchased the property for cash with hard money, which covered 90% of acquisition and 100% of REHAB. He had a REFI set up to go with a local bank. Once closed he immediately did the REFI at 80% LTV on the ARV. The property was appraised at $101,000.

He basically got $80,800, which paid back the hard money lender's $60,000 + $1,800 in HM fees + 2 months of HM interest at 11% ($1,100)=$62,900. Approx. $2,100 in closing costs for the REFI. Paid himself back his 10% down ($5,000) and still walked with approx. $10,800 in his pocket.

$80,800 (80% REFI)

-$60,000 (HM Loan)

-$1,800 (HM Fees)

-$1,100 (HM Interest)

-$2,100 (REFI Fees)

-$5,000 (Personal Pay Back of 10% Down Payment)

___________

$10,800 Surplus

Performing asset with around $375/monthly cash flow.