Deal Analysis & Financing Questions

[Kacy Clements]

I'm a new investor, and do not currently have any investment properties in my portfolio although I do own my current residence. I have a couple questions that I would be so grateful if anyone could help answer for me.

I have a deal that I have looked into locally, which is a three unit property, currently rented, but needs work. It is listed for 140,000, is probably a C property at a cap rate of maybe 10, but definitely one that I could put work into to decrease the cap rate. The current rents are also quite a bit below market at 1,650 NOI for all three. Using the BiggerPockets blog posts, I figure that the value of the property is more like 198,000 (NOI/Cap rate 19800/.10) (If I'm calculating this wrong please let me know!). This sounds like a good deal to me, especially because I can rehab the units and rent them for about 500 more (total), decrease the cap rate and at least get it closer to a B property, maybe an 8 cap rate which would make the value more like 322,500 (25800/.08).

If this is a good deal, my next question would be about financing. I have been looking into a home equity loan for some of the down payment, and I am able to tap into enough for a 20% down payment, but have been reading conflicting opinions on this strategy. Of course, I've read Brandon Turner's Investing in Real Estate with No and Low Money Down book and it is a strategy in the book, yet some investors in the forums dissuade new investors from using home equity. Would this be a bad idea? After obtaining the home equity, I would like to use a portfolio loan/ private lender for the loan. I'm looking for a 30-year loan with a decent interest rate that covers up to 80% LTV. I've looked into quite a few and most are 75% LTV or lower which my equity loan wouldn't quite cover. If I were to use a shorter loan such as a hard money loan, I would be worried I wouldn't be able to move out the tenants and rehab the property before the loan term runs out so the ARV would be high enough for the refi. Does anyone have any suggestions for sources of lending? Or any advice would be gratefully appreciated!