How to find a lender for rehab costs only

Question

Hello BP Forum!

Right next door to my childhood home in a suburb of Cleveland, Ohio, I have noticed that the property has been vacant for years. When there was someone living there when I was a kid, he took awful care of it. The inside may have animals (raccoons), and the whole thing probably needs to be gutted. When that man moved out, they redid the siding because the city forced them to. I am looking into contacting the landlord (who I believe is an older woman that is losing money by owning it) and want to see if I can get a look inside (possibly with an inspector?) to see what it looks like. I feel like with the condition of the house and getting this property off the owners hands, I might be able to get a really good deal ($15-30k Cash offer, maybe less). Since this would be my first investment, I have some questions and was looking for some help!

1. If I'm paying for the house in cash, how would I go about getting a loan for rehab costs only? I gotta imagine this will be minimum 50k to complete. Are there different loan options to choose from?

2. I feel like paying in cash would be preferred with this landlord since she's older and probably would like to get rid of it, but is looking into a traditional loan worth it if I can get the estimated rehab costs included?

3. Is there anything else I should consider? (I'm sure there's something I'm missing!

BTW after rehabbing I'd like this property to be a LTR

Any advice would be greatly appreciated!

Eliott Elias · Answer

I would go the hard money route.

Shane Kelly · Answer

Well in a case like this, it pays to have exit strategies. I can tell you that just running the numbers on the top of my head. If you're purchasing for 10k, with 85k in rehab, and it rents for $1400 even on the low end, then you're making money. More importantly, if you're not, if comps are $175k then you can easily flip this and get out of it with more than break even easily. And if you're getting bids from contractors and you see the potential to do so, then you should have room to wholesale it. I think this is a no brainer deal, but that's just what I'm seeing from my end.

Nico Ferreri · Answer

I ran some estimations using the BRRRR calculator on the website. I estimated buying the property for 10k and putting 75k rehab into it. Comps in my neighborhood are around 175k, and rents are between $1400-1600/month. Putting 85k into this with the comps being 175k seems like a great deal right? But in the calculator it showed that with my conservative estimates I wouldn't even be cash flowing after refinancing? Now thats with PM at 10% which I wouldn't hire, but I'm curious how a deal seeming this good wouldn't cash flow.

Nico Ferreri · Answer

Thanks Frank! I am in the process of getting the owners contact information to see if they are willing to get rid of the house! Regarding my long term plan, if it wasn't for this property mentioned in the post, my original goal is to house hack. My girlfriend and I will probably be moving next year to where ever she will be attending PA school. I was thinking of doing this deal with my neighbors house and maybe do some type of cash out refi to use for the house hack next year. If I don't purchase my neighbors house, I'd probably try to do a low downpayment loan option to house hack a small multifamily property. I am a social studies teacher for my W-2 job, but want to grow my real estate portfolio for long term wealth and financial freedom!

Shane Kelly · Answer

Welcome to BP! You could do it with hard money. It would allow you to BRRRR it as well. If you don't know what either of those are, then search them on here and you'll get a lot of good info on how to use them properly and why they're useful.

Frank Avallone II · Answer

Hi @Nico Ferreri, sounds like a nice idea!

If you are able to take a look try to bring a knowledgeable contractor with you so he can help estimate the true cost of rehab.

Depending on your financial situation you may have a few different options here as far as financing.

One option to consider is a renovation loan which could allow you to finance part of the property and all of the renovation costs. Doing it this way will help you position yourself for having it as a rental after it is fixed up.

I'd love to hear more about your situation and long term plan!

How to find a lender for rehab costs only

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