Quote from @Mike Klarman:
Gotcha. So you are in a 30 year loan product. That's why there is a PPP. So for three years there is a penalty if you sell, or refi. You can choose a 0 PPP which means you can sell or refi at anytime but the rates are higher. The longer the PPP the cheaper the rate, she shorter it is the longer.
So you cannot take any equity out of the investment house until April 2026 because if you break your mortgage before then there will be a penalty.
I can say that between STR and LTR location is a big key. Is there a reason that customers would book STR where you are? This is in FLA right? So is there a beach near by. STR usually cash flows heavier than LTR but the leverage you get will be less. That's the catch 22. Industry still looks at STR as a bit riskier than LTR cause there's no lease.
Lots of investors use bridge loans which are short term loan programs that include funding toward the acquisition plus funding toward the rehab. You get 12 months to fix the house up and either sell it or get renters in there and refi into a 30 year DSCR product. Bridge loans are interest only payments with no PPP. You can pay it off at any time. Ideally, you wanna be out of the bridge loan in six months. Picking up the property in distress and fixing it up offers an opportunity to get some, most, or all of your capital back at the refi table.
Here is a very simple deal to play out how it works. You find a house that has an ARV of 300k let's say. Multiply that 300k by 72.5%. That gives you 217,500. Now 217,500 is what you want your max budget to be on this project. Maybe 220 absolute max. You find a distressed house and they are asking 175k. That leaves you with 45k in rehab to stay at that 220k max budget. You get a GC that you pre-vetted, to walk the property and come up with a budget to get it comparable with the inventory in the neighborhood. The GC comes back to you and says the house needs 57k to get it into shape. That means that 220k - 57k is your max offer. That's 163k. Now let's say the offer is accepted. Now you enter a bridge loan that will provide 85% (with some exp and good credit) of the purchase and the 57k in escrow for rehab funds. So you'd come with the 15% of the 163k which is $24,450 plus closing costs on an approx 200k loan (5k - 6k). So you are in 30k.
Now it takes 90 days to complete the rehab and you made three loan payments of like 1500 let's say so no you are in 35k plus incidental costs like utilities and insurance let's call it 38k. But now that the house is done you get a renter in there and get a lease in place and now you can get a 75% cash out refi based on new value. An appraisal will get done and let's say it comes back at that 300k. You can get a cash out DSCR loan for 225k. You have a 197k bridge loan to pay off. That leaves 28k that you get to recoup of your 38k. So you only leave 10k in this house instead of 38k.
That's the advantage of picking houses up while in the distressed state.
Wow. That is an incredibly detailed description, thank you so much for taking the time to explain that!
When you say I cant refi until April 2026, do you mean you think its a poor business move? Or that i literally "cant" because a bank wont allow it? The original underwriter of the loan had actually told me it was possibly worth it to refi after a year and pay the PPP because of there being 50K instant equity in the house- which if I am not mistaken, is the difference between the purchase price and the actual appraisal value?
As for STR, I am about 20 minutes from the beach and it wouldn't have much attraction IMO as far as marketing it as a vacation or getaway or anything like that, especially because it is only about the size of a studio (its a garage conversion for the bedroom, and then an additional kitchenette area and bathroom behind it). My thinking was that it could possibly be more attractive for a tenant looking to go week to week, or month to month, without needing to put as much down for 1st, last, and security, and at the same time I wouldn't hold the risk of a bad tenant being stuck living there with a 1 year lease. Thoughts?
I welcome everyone to poke holes in my ideas/assumptions/situation/etc. With me being new to all of this, I want to get as much input as possible from everyone who can make a recommendation or possibly help me avoid a major pitfall that I don't see coming.
