Buy and Hold (Cash + Rehab + Refinance).. How do you do it?>

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Buy and Hold (Cash + Rehab + Refinance).. How do you do it?>

Triston Murray
Investor · Chicago, IL · Member since 2014 · 41 posts · 11 votes

Hello all. I apologize if this post is poorly written!!

I have been doing research into the hold strategy of: buying with cash (personal or borrowed), then rehabbing, renting and refinancing with conventional after seasoning. This strategy would only be used on places that can be purchased and rehabbed for less than 60% ARV.

My issue, and question for everyone I suppose, is one of preparation required, timing and RISK. I'm such a newbie to the game and only just purchased my first owner occupied multi-fam in Chicago in Feb '14. After a very dramatic 10+ months with ****** (ex coworker) tenants (BIG MISTAKE LEARNED EARLY), I hired a PM and am now looking at roughly 800 net cash flow per month after ALL expenses (including a 100/mo rainy day fund)....

Now that I'm cash flowing I want to start making moves again. SOO: does any one use the cash+rehab+refi+hold strategy? what did you need in order to get it going? is it easily rise and repeatable? did you use your own money? 

...I'm fairly young 26 and although i have decent income/ credit... not much saved... but this strategy seems so solid that I feel very confident I could pay back a family member if they lent to me... i'm even entertaining the idea of hard money loans, but am not too familiar with their terms rates etc..... I'm I wrong for having faith in a system I have not proven myself? What would others do if in my shoes to expand quickly?!

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Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
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Originally posted by @Derek Woods:

I am looking at a credit card strategy aswell. Purchase price of 25k with 5k down out of pocket. 10-15k in rehab should put the house around 80k ARV. So I plan to refinace the property to pay back all cards and my down payment. Maybe a few thousand extra to help with keep the next down payment from coming out of pocket. I have the reserves to cover the rehab costs (pay off cards). Worst case scenario. Hopefully this works. Still trying to figure out the best strategy for me.

 HI Derek,

I've personally toyed with this strategy and have learned through case studies I've worked on as well. The main problem I see is when you utilize higher than 30% of your revolving line of credit or credit card your FICO scores start to tank. If you max out a revolving line your score will probably be 75-100 points lower so when you go into a conventional lender like myself we may not be able to qualify you.

With this consideration due to FICO score management, I've started to build business credit through my entity since business credit gauged by "paydex," scores dont factor your utilization rate of a line or card against you rather the composition of your score is based on how fast you pay your creditors. This is much better since you dont have to rack your brain micro managing all of your cards or revolving lines of credit with out worrying about its affect on your credit scores and ultimately your "exit strategy."

The above happens a lot, I'll get an investor who is leveraged to the hilt maxing out their cards and revolving lines to purchase and rehab only to come to me to find out their 765 FICO is now a 640-660 and they are now stuck between a rock and a hard place.

@Brie Schmidt The other thing Brie mentioned is super important also, the DTI ratios, you should have this dialed in and planned even before your rehab project is started. Why? Because you dont want to end up like the above example with credit and fico scores but now its not with credit its with your income ratios being "off," what you need to qualify.

Last I would preface, reserves, a lot of investors do not look at how much reserves they will need to keep aside to obtain financing. Generally you'll need around 6 months of the entire monthly outflow of a property and up to 12 months sometimes for cash out refinances (depending on your credit score) and about 2-6 months for each other financed residential property. The local community & commercial banks and non Fannie/Freddie based lenders may be much more lenient with the post closing cash reserves FYI. 

I would recommend that all who are working on the buy, rehab, refi, hold strategy to plan all areas of qualification - credit, debt to income or debt service depending on the bank, reserves.

Hope that helps! let me know if you have any questions.

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  • Triston Murray
    OP
    Investor · Chicago, IL · Member since 2014 · 41 posts · 11 votes
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    @Clay Manship I'm especially interested in how you overcame the first hurdles of using this strategy in your area!

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  • Crystal SmithPro Member
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    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
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    Nothing wrong with your strategy. There are a few outfits that will allow you to refinance out without seasoning after the renovation is complete. Their primary criteria is the property must appraise out then they will provide a loan based on the new value of the property (Mostly applies to SFR). You may want to consider these companies to accelerate your strategy.

    Another strategy to consider is flip-flip-hold.  Use cash to flip 2 properties; then use the profit from the flips to purchase a property to hold.  Use OPM for the flips then your cash for the hold.  Naturally you can adjust this based on the profits from the flips.  Just food for thought.

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  • Triston Murray
    OP
    Investor · Chicago, IL · Member since 2014 · 41 posts · 11 votes
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    Ha, I hadn't considered any of that @Crystal Smith .. (not sarcasm! I really feel dumb for not considering more options)... mentally, I've been geared towards strict hold strategy, but with those suggestions incorporated it would definitely accelerate things! I need to be more flexible :( So basically the overall plan is good? It sounds like I just need to get on the horn and see what is available to me and who can offer it..... and make a move.

    The initial cost+rehab $ is where I'm getting hung up.... I could wait a few years and save, but id like to move sooner; ideally I'd borrow from family, but if that is not an option would you advise against using a hard money loan? What would be the best alternative to personal cash if I wanted to move on this strategy within a few months from now?

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  • Crystal SmithPro Member
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    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
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    @ Trinston Murray If you can borrow from family then go for it.  My opinion:  Only use hard money if you have enough data to support a quick renovation & short days on market. Many hard money loans have a term of 6 months.  There are a few that we've dealt w/ that have longer durations.  Some may be on this BP site.  W/ private money from family/friends you'll hopefully have more flexibility if the property sits longer than expected.  

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  • Larry Smet
    Flipper / Rehabber / Real Estate Investor · Toronto, Ontario · Member since 2012 · 392 posts · 77 votes
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    Hi @Triston Murray 

    I agree with everything that @Crystal Smith is saying above and would echo it.  In fact, that's what I'm doing (have been flipping for couple years and now starting to pick up rentals).  I'll just add that the other thing you should consider is partnering with someone.  It has its risks but also significant rewards and provides a lot of flexibility.  You don't have to go private (or hard) money necessarily.  However if you decide to partner definitely get professional advice and put an operating agreement together so both (all) partners know what their jobs are.

    Good luck

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  • Clay Manship
    Indianapolis, IN · Member since 2013 · 549 posts · 310 votes
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    @Triston Murray 

    What @Crystal Smith and @Larry Smet are saying is both factual and accurate. A lot of people like doing what Crystal mentioned--flip--hold or flip--flip--hold. It is just one of hundreds of strategies used to accumulate wealth in real estate and get income producing properties.

    Basically, Crystal is saying this:

    1. Find a family member (private money) to lend you one lump sum for 100% of the purchase price and renovation of one flip. Once this flip is complete (sold), do the exact same thing again. DON'T USE YOUR MONEY yet, use the same private money.

    Once you have completed two flips, THEN use the cash profit from these two flips to buy an income-producing property in cash. That way you own a house free and clear and can always use debt if/when you need to later on (but that is a story for a different day).

    That is what I do, however, I have a different exit strategy. In Crystal's example above, her primary exit strategy is a SALE. My exit strategy for every property I buy is a REFINANCE, which is just a fancy term for "getting a new loan." Let's say I borrow a total of $50,000 to buy a property for $25,000 that needs $25,000 in remodel, after it is complete and rented out, I will then refinance, instead of sell.

    Let's say that the after repair value (ARV) is $100,000 now. I have a lender here in Indianapolis that will give me a loan on this property at 75% LTV (loan to value). Because the VALUE is now $100,000, I can get a loan for $75,000 if I wanted to. But instead, I only take the bank up for $50,000 so that I can pay my private lender back his money, and then cash flow a little better than if I had a higher loan amount.

    After it's all said and done, VIOLA! I have complete ownership of a cash-flowing property using ZERO of my own money. Now, it is much easier said than done, and there are many moving parts, but that is the basics of it. If I am you, find a strategy that you can implement that will help you achieve your goals. Mine is to accumulate dozens of high cash-flow, income-producing properties. Maybe when I get good enough at it, I can add finding properties with a high enough margin to begin my flipping career using no money of my own. Only time will tell.

    Good luck!

    2Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
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    @Triston Murray That's a very common strategy. There is more risk involved of course. I would recommend only doing that in your own backyard, be sure of the ARV and understand what real estate prices are doing. You don't want to do this when prices are dropping which they may do in some markets in 2015. The other big question is what is your exit strategy? Do you have an investor network that you can quickly sell it in to or will you have to list it which will cut your profits?

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  • Triston Murray
    OP
    Investor · Chicago, IL · Member since 2014 · 41 posts · 11 votes
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    Hey @Mike D'Arrigo ! Thanks for your thoughts...... when I was initially musing on this strategy my exit was simply refi. I didn't even consider flip-flip-hold as what @Crystal Smith mentioned. But if I were to sell instead of refi, I suppose I would just have to list it, I have no connections in RE :( ..... but then again I'm perfectly fine with a refi and hold.

    SO many ways to skin a cat!

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  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
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    @Triston Murray 

    That's the beauty of RE investment--so many ways to make money if you do it right.

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  • Ben StoodleyBusiness Member
    Lender · San Diego, CA · Member since 2014 · 266 posts · 161 votes
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    Hi @Triston Murray ,

    Congrats on your first purchase and in the end, it was successful! Definitely keep moving! 

    I am a lender and investor myself. I just wanted to let you know about the Hard Money route, as that is my main job. 

    I do a lot of loans for people doing just this, buying with hard money, fixing, renting, refinancing out with conventional bank loans. It is a great way to beat your competition on the good deals with multiple offers. HOWEVER, the hard money loans will most likely cover only between 65% and 80% of the purchase and SHOULD cover 100% of the rehab, depending on the deal. You will need to seek out GOOD Hard Money Lenders (HML). This isn't always easy either. Find a DIRECT lender, that can actually close with their own money within a couple days (great way to test if they are truly direct). We will lend up to 80% of purchase + 100% Rehab on general flips. This is usually easier done on SFRs, but could still be done on Multi-Fams and rentals. If you get a HML deal, make sure there is no Pre Payment Penalty (PPP). This will be important depending on your exit strategy. Another good questions would be to ask the HML is they are an ARV lender, meaning they will lend up to a certain % of the fixed future value. MOST IMPORTANT, if and when you do go the HML route, find a lender that cares about you and truly wants you to succeed, not just get a loan and be done. Ask if their rates become more flexible over time, as you build that relationship. This is huge. You want to deal with 1-2 lenders for all RE Investments. Lastly, ask about their junk fees. This can be in the form of processing, appraisal, inspection, underwriting, etc. All of their different names amounting to $1500-$3500 in JUNK fees that can and should easily be avoided.

    Hope this helps and best of luck to you !!!

    -Ben

    3Reply
  • Shawn Holsapple
    Residential Real Estate Broker · Indianapolis, IN · Member since 2010 · 1k+ posts · 557 votes
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    @Triston Murray I bought my first rental SFH with a zero balance transfer offer from a credit card. I just wrote my LLC the full balance amount [$10k] which covered the purchase [yes, it was in a war zone - but you have to start somewhere] and then funded the rehab with more cards from Lowes & Home Depot. My only cash out of pocket was a few hundred to pay for labor.

    I then found a local credit union [small State Banks are great too] to refi it at the appraised value.  BOOM - paid all the loans back and walked away with a couple grand tax free in equity.

    Now, I use OPM to buy the home and fix up then go to those same local credit unions to refi. They don't require any seasoning and will go 75% LTV and down to a $10k loan amount.

    I hope that helps.

    Good luck.

    1Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
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    From a tax perspective, I think it's really bad advice to flip some and hold some... unless you are flipping in an entity (e.g. S-Corp) that will be tagged as the real estate "dealer" and not you regarded as a real estate dealer. Please consult a qualified tax specialist for the best guidance for your particular flipping operation.

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  • Triston Murray
    OP
    Investor · Chicago, IL · Member since 2014 · 41 posts · 11 votes
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    Nice @Shawn Holsapple ... that's some bootstrapping! It awesome to hear that someone can make it work from nearly scratch. I need to get with some local credit unions... The no seasoning and low loan amount would really add flexibility.

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  • Derek Martin
    Investor & Attorney · Chicago, IL · Member since 2014 · 86 posts · 29 votes
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    I am doing the cash+rehab+refinance method you described with SFR in the Chicago suburbs. It can be done, but there are definitely some limitations. For example, my lender (local bank) requires 6 months seasoning (having a renter) after the rehab. Also, they will only cash-out refi 4 properties. So I need to pay one off before cashing out the fifth.

    However, they do 75% LTV which allows me to get all the cash out. A deal in my area might be a $50k purchase and $20k rehab. It rents for $1300-$1400 and appraises for $100k-$120k at the cash-out refi.

    I would recommend this "rinse and repeat" method as a slow and steady way to build your portfolio. But it's not the fastest or easiest. For that, nothing beats private money. 

    0Reply
  • Triston Murray
    OP
    Investor · Chicago, IL · Member since 2014 · 41 posts · 11 votes
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    wow! @Derek Martin its good to hear success on in my own back yard! I've been reaching out to lenders all day today and will continue to do so going forward... I have actually had some helpful responses. so hopefully all falls together well and I'l be able to make moves!

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  • Derek Woods
    Investor · Ashland, KY · Member since 2014 · 77 posts · 12 votes
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    I am looking at a credit card strategy aswell. Purchase price of 25k with 5k down out of pocket. 10-15k in rehab should put the house around 80k ARV. So I plan to refinace the property to pay back all cards and my down payment. Maybe a few thousand extra to help with keep the next down payment from coming out of pocket. I have the reserves to cover the rehab costs (pay off cards). Worst case scenario. Hopefully this works. Still trying to figure out the best strategy for me.

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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    @Triston Murray The advice I always give, and where I see investors lack, is to learn banking requirements front to back. You could buy the best property, rehab it great, and force appreciation... then go to refi and your DTI is totally off, or your credit score isn't enough, and then you are stuck. I have seen a lot of people with very expensive HML now need to sell or take a loss.

    If you don't know what your DTI is off the top of your head or within 5 minutes of being asked, then you need to know. Make sure you can qualify before spending and borrowing with a limited exit strategy.

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    3Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
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    Originally posted by @Derek Woods:

    I am looking at a credit card strategy aswell. Purchase price of 25k with 5k down out of pocket. 10-15k in rehab should put the house around 80k ARV. So I plan to refinace the property to pay back all cards and my down payment. Maybe a few thousand extra to help with keep the next down payment from coming out of pocket. I have the reserves to cover the rehab costs (pay off cards). Worst case scenario. Hopefully this works. Still trying to figure out the best strategy for me.

     HI Derek,

    I've personally toyed with this strategy and have learned through case studies I've worked on as well. The main problem I see is when you utilize higher than 30% of your revolving line of credit or credit card your FICO scores start to tank. If you max out a revolving line your score will probably be 75-100 points lower so when you go into a conventional lender like myself we may not be able to qualify you.

    With this consideration due to FICO score management, I've started to build business credit through my entity since business credit gauged by "paydex," scores dont factor your utilization rate of a line or card against you rather the composition of your score is based on how fast you pay your creditors. This is much better since you dont have to rack your brain micro managing all of your cards or revolving lines of credit with out worrying about its affect on your credit scores and ultimately your "exit strategy."

    The above happens a lot, I'll get an investor who is leveraged to the hilt maxing out their cards and revolving lines to purchase and rehab only to come to me to find out their 765 FICO is now a 640-660 and they are now stuck between a rock and a hard place.

    @Brie Schmidt The other thing Brie mentioned is super important also, the DTI ratios, you should have this dialed in and planned even before your rehab project is started. Why? Because you dont want to end up like the above example with credit and fico scores but now its not with credit its with your income ratios being "off," what you need to qualify.

    Last I would preface, reserves, a lot of investors do not look at how much reserves they will need to keep aside to obtain financing. Generally you'll need around 6 months of the entire monthly outflow of a property and up to 12 months sometimes for cash out refinances (depending on your credit score) and about 2-6 months for each other financed residential property. The local community & commercial banks and non Fannie/Freddie based lenders may be much more lenient with the post closing cash reserves FYI. 

    I would recommend that all who are working on the buy, rehab, refi, hold strategy to plan all areas of qualification - credit, debt to income or debt service depending on the bank, reserves.

    Hope that helps! let me know if you have any questions.

    5Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    11y

    @Triston Murray Regarding the tax implication referenced @Chris Martin, he's correct to advice you to consult a tax expert. We purchase all of our properties inside of an entity. For properties that we know we will own for less than one year (i.e. they are a potential flip) we use S-Corp. Greater than one year we used an LLC.

    312-681-7487
    1Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Derek Martin:

    I am doing the cash+rehab+refinance method you described with SFR in the Chicago suburbs. It can be done, but there are definitely some limitations. For example, my lender (local bank) requires 6 months seasoning (having a renter) after the rehab. Also, they will only cash-out refi 4 properties. So I need to pay one off before cashing out the fifth.

    However, they do 75% LTV which allows me to get all the cash out. A deal in my area might be a $50k purchase and $20k rehab. It rents for $1300-$1400 and appraises for $100k-$120k at the cash-out refi.

    I would recommend this "rinse and repeat" method as a slow and steady way to build your portfolio. But it's not the fastest or easiest. For that, nothing beats private money. 

     Hi Derek,

    Your local lender may be a conventional lender or is basing their guidelines off of conventional guidelines. I've found that smaller community or commercial bankers have even been able to cash out off of proforma rent (no tenants in yet!) or with no seasoning. Of course they won't do it right away if you ask but if you cordially went in to meet with the loan officer and neatly prepared your file with supporting documentation to establish your track record (prior to actually needing the money) it would make a much better case.

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  • Derek Martin
    Investor & Attorney · Chicago, IL · Member since 2014 · 86 posts · 29 votes
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    As mentioned, this strategy can greatly impact ones creditworthiness. And it's difficult enough determining how to allocate limited cash among rehab, reserves, and the next deal. I wouldn't dare bring credit cards or hard-money into the mix. But everyone has their own considerations and tolerance for risk.

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  • Scot Howat
    Investor · Hoffman Estates, IL · Member since 2014 · 434 posts · 185 votes
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    I know a guy who rehabs homes just to keep them as rentals.

    The best option would be to get private money up front for the purchase + rehab.  You'd probably need a really good deal, a good track record, or a willing family member with money to pull that off.

    Or you could get hard money to rehab the property and then look to use private money or conventional to hold it.  But I'd make sure you lined up the long term financing BEFORE starting the rehab.  You don't want to get stuck holding it with hard money, and they may only have a 6-12 month term too. 

    0Reply
  • Keith J.
    Rental Property Investor · USA · Member since 2015 · 5 posts · 0 votes
    11y

    I've been using the buy, rehab, refi strategy for about 4 years now. My plan was to do one per year. Now that I'm working on my fifth rental I found out that I can only have 4 fixed conv loans. My options seem to be either using a 5/1 ARM 25yr, current rate is at 4.5% and topping at 15%!!! Or option 2 is just save til I can buy with cash. The flip, flip hold method is actually starting to sound pretty good too. I don't like the idea of using ARM's. Has anyone had success using them, and what are your plans for the property when the rate starts to skyrocket?

    0Reply
  • Account Closed
    Investor · Washington, DC · Member since 2015 · 17 posts · 4 votes
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    Originally posted by @Crystal Smith:

    @Triston Murray Regarding the tax implication referenced @Chris Martin, he's correct to advice you to consult a tax expert. We purchase all of our properties inside of an entity. For properties that we know we will own for less than one year (i.e. they are a potential flip) we use S-Corp. Greater than one year we used an LLC.

    Thanks for this Crystal!! I was under the impression that you can't refinance (HELOC) from within an LLC based on some posts around here. Is that true? Under what conditions can one HELOC under an LLC?

    0Reply
  • Account Closed
    Investor · Washington, DC · Member since 2015 · 17 posts · 4 votes
    11y

    @Albert Bui thanks for the 'paydex' info. I have been exploring this for a while and wondering if its worth it in this business line. Have you found cheaper ways of getting a paydex score? I called DB, and it would costs a significant chunk of change to develop a good paydex score. Of course, you can register for free, but it costs money for them to track your payments.

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