Alright trusted and respected BP family... I apologize in advance for the length of this. I just realized exactly how long it is. Much appreciation for anyone who actually reads this mini-novel and has advice to offer :)
I know this is a common theme around these here parts (please, evaluate my plan!) but I'm jumping on the bandwagon because I'm hoping those with experience will be able to point out risks, downfalls, or opportunities that I'm not seeing.
Current situation in a nutshell: steady FT income, ~17% DTI, credit scores in the high 700s. Excluding reserves, we have ~30k for the acquisition of our first property.
Our immediate goal is to acquire our first property with cash... a fixer upper purchased for less than 30k.
Rehab - With a 30k price tag, we are expecting extensive rehab. We have a good rehab team in place (we believe) and are expecting to put 40-60k rehab into the unit. Our goal is to finance the repairs using a combination of the following methods:
- HELOC - I know finding a bank to do this on an investment property will be tough, but we have good relationships with several local credit unions and little banks and I have faith we could get it done
- Personal lines of credit / loans - we currently have several lines of credit (~ 60k available at interest rates varying from 8% to 25%)
- "Borrowing from individuals" - we have several friends and family members who have expressed interest in offering us cash loans ranging from 10k-25k with interest that would be lower than a bank but a higher return than they'll get from their savings accounts
The ideal plan would be to find a bank willing to immediately offer a HELOC up to the full repairs amount and finance them all with low interest. Plan B would be to use about 20k worth of lines of credit or cash borrowed to put enough rehab work into it that it appraises for the maximum HELOC amount, then use that to finance the rest of the repairs. Plan C would be to use lines of credit and/or cash borrowed to completely do the rehab - then either sell and pay it off, or get a HELOC to "refi" essentially and pay off the higher interest lines. If there is a seasoning period for the HELOC, worst case we'd have a vacant, unrehabbed house on our hands for 6 months (taxes + ins + utilities for 6 months: ~$1000-2000 which is a cost we'd be willing to eat if it meant saving more on interest in the long run)
Exit strategies would be either sell or rent, obviously. Recent comps (same specs, same neighborhood, within the last 3 months) sold in less than 30 days for $130k and rent for $950.
If we sold, we'd likely price it around $120k for a quick sale. Maybe $130k and advertise closing costs with a full price offer (we are in a USDA eligible area and would play that to our advantage) After paying off the financing from the rehab, we'd hope to walk away with a 15k-20k profit and rinse/repeat. If we held and let it, we'd either quickly pay down the debt (2-5 years with ~2k a month) or somehow leverage the equity to get into Deal #2. Ideally, we'd have such a successful outcome that with our newfound experience we could use OPM for Deal #2, but we'll see ;)
So, the biggest risks as I see them stand as -
- Not much of a margin between our budgeted rehab costs and the financing available to us. A 50k rehab sounds doable, but a horrible discovery could send a 50k rehab into the land of 80k which is a very stressful place for us - if not damn near impossible to even reach.
- Our entire strategy is dependent on either immediately or eventually (6 months) getting a HELOC (which could be a feat in and of itself) to cover the entire cost of repairs - so at best (50k line) we need the banks appraisal to come in near 70k... which could be tough if we purchase at 30k.
I have a very high tolerance for risk, and an equally high optimistic streak. (I'm the type of person who thinks putting stainless steel appliances in a rental will reduce tenant turnover) My husband has a medium to high tolerance for risk, and a more realistic (and sometimes pessimistic) point of view. (According to him, the likelihood of future tenants Breaking Bad in our units is 99%) Luckily, we share the same goals and have a track record of being able to create an awesome plan and execute said awesome plan successfully.
So BPers... thoughts? Recommendations? Opinions? Experiences?
There are much smarter rehab analysts on here than me, and hopefully they will provide better insight, but off the top of my head, it's been my experience that banks want to cash-out refi a home after it's been fixed up and appraised, not before rehab, for people who are not established in the investment business. Some of those personal loans may want an origination-fee type payment if you're only going to use their money for the 2-3 months you'll need for rehab as it may not be worth their time or risk just for 3 months of interest, so I'd clarify the terms before relying on that route. More importantly, have you considered that if you pay $30K, end up putting $60K into it then selling for $120K, then after realtor fees, transfer fees, closing costs, etc., you're likely to be putting all this effort in for potential $10-$15K profit? And that is not taking into account carrying costs like loan payments, insurance, utilities, maintenance, etc. I would personally want to obtain contractor bids during an inspection phase to insure it would be closer to the $40K rehab. As far as the tenant issues, there is great info on this site on tenant screening, and you'll have plenty of time to read up on it all during the rehab. But you'd need to make your decision early on as selling requires a different focus than hardening a rental for tenants.
@Lynn M. thank you for your insights :) I have factored in the other agents commission (I'm licensed here in MD) transfer fees, closing costs etc and while we'd hope for more, a 10-15k profit would be more than acceptable for all the effort (aka experience :P )
What I didn't factor in was origination fees on personal loans because I was more thinking along the lines of charging the cost of materials to our personal and business credit cards, and borrowing the cash from a private investor to pay for labor. Guess I'm wondering if it's my inexperience thinking that that's a travelable road... :)
@Lynn M. I just reread your post. This bit stuck out to me again: But you'd need to make your decision early on as selling requires a different focus than hardening a rental for tenants.
I hadn't really thought of it that . Thank you :)
Hi Sam and Heather!!!
Wow - I'm really impressed. Sounds like you guys are really lining your ducks up well and are ready to take aim.
I don't have too much to offer in the way insightful guidance; but I would suggest you consider Harford Bank for a commercial loan (if you have or will be forming an LLC). I have talked to their loan manager at the Bel Air branch (believe they have a branch in Cecil as well; but I believe the person I talked to is the loan manager for all 3 branches - but stationed at Bel Air day-to-day). Anyway - they will loan 80% of the purchase price + rehab costs. (i.e. 80%[purchase price] + rehab cost).
The down side is the interest rates (4.75 - 5.25%) are a bit higher than normal mortgage rates for residential properties; and they ammoratize their loans over 20 or 25 years (not 30). While not ideal - the terms could work for a buy and hold as well as flip. Don't believe there's an early payoff penalty (I didn't ask though). Even if it's not the selected route on your first go-round; it may pay to visit and have a chat as at some point you may want to have the option lined up and ready to fire.
The way the process works: they'll give you a general idea as to whether you might qualify in a general $ range provided everything checks; but they don't do pre-qualifications. You would have to put the contract in contingent on financing. They would then do an after rehab assessment - and then approve or deny based on your qualifications as well as the deal itself. You would draw down rehab costs as-you-go from an account. (better to over estimate a little rather than have to go back and seek approval for more; if you don't use it all then you close-out and the less you owe). As you build a history with your LLC, at some point your personal qualifications would not factor into future loan applications. I've been assured approval turn-around is quick (I haven't yet pulled a deal either); that within the $ range I'm looking (approximate to yours) she can personally approve vs. it having to go before the board as a bigger commercial project might.
Wow - this is almost as long as your original post. Hope its helpful. BTW - If you're interested, I may be interested in partnering w/ you guys if the circumstance fit. I'm devoting FT to the effort - am in the same boat as you guys in terms of price points and geographic area of interest (the 130K sounds like a 900+/- SF rancher in Aberdeen); and I have a little more working capital at-hand than you guys which might allow for cash purchase and rehab. PM me if interested. Hope to see you at a Harford REIA meeting soon - I've missed the last few.
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