Help me understand - is this viable process?

Question

I should note I've been involved in real estate in 1 way or another for many years aND am now looking to get into the investment side of it. Is this a feisable option and process of a short/mid term Single family home.

I purchase a distressed investment property at approximately 30% discount ($200,000 valued property purchased for $140,000). Traditional bank financing is out, Being an investment and being self employed with low income after tax write offs, so I opt for private or hard money lending with an interest only loan as traditional financing is not currently available to me.

After rehab I now have 40% equity in the home (property now appraises for $233,000). Because of the initial wholesale price discount and the additional equity from rehab I then refinance with a traditional bank with a loan around 60% ltv so that I can then start paying down the principal. The reason the bank would grant this loan at this time is because of the 90k in equity the property has in addition to having a year or 2 of continous rent.

Help me understand if/where i got anything wrong or if there are other options available at any point in this process. Obviously this is a perfect example and numbers may be inflated, I'm just trying to make sure I grasp the concepts.

Wesley Weber · Answer

Sorry just saw your post about finding a partner for the refinance.

Wesley Weber · Answer

The renter would ideally be put in place after rehab for 1-2 years before refinance. What options are available if not bank financing for a refiNance on a long term rental?

Joe Villeneuve · Answer

Quick answer ....NO....for many reasons, many holes, many conflicts, many disconnects.  let's start at the top.  A: = Assumption; F: = Fact:

A1: I purchase a distressed investment property at approximately 30% discount ($200,000 valued property purchased for $140,000). However, that 30% equity you are starting out with is based on you rehabbing it to make it that value.F1:  This you can do.

A2: Traditional bank financing is out, Being an investment and being self employed with low income after tax write offs, so I opt for private or hard money lending with an interest only loan as traditional financing is not currently available to me.F2: This works too, but...

...here is where the false assumptions, etc... begin.

A3:  After rehab I now have 40% equity in the home (property now appraises for $233,000). F3:  Although this is possible, it is highly unlikely.  The rehab will get your ARV up to that $2000k from A1, but like I said, this is possible.

A4: Because of the initial wholesale price discount and the additional equity from rehab I then refinance with a traditional bank with a loan around 60% ltv so that I can then start paying down the principal. F3:  Uhhhh....No.

A4:  The reason the bank would grant this loan at this time is because of the 90k in equity the property has...F4:   Uhhhh....no, that's not the reason.  The reasons are still the same...DTI, self employed, etc...

A5:  ....in addition to having a year or 2 of continuous rent.A5a:  This is where I'm confused.  When did you get a tenant in place?  Was the tenant already in place for this 1-2 years?  If so, how/when did you do all this rehab?  Around them living there?  Not going to happen.A5b:  ...or, you are not going to get this REFI loan for 1-2 years so you can establish this income?  I thought you bought this with a HML?  You're NOT going to hold a HML for longer than 6 months...and even if you did/could, the interest cost would eat up any cash flow and profits you would have.  This last "Assumption (5)" is way off.

However, if you took on a partner for that refi, you would reap the benefits of the cash flow (if holding) and/or profit when/if you flip.  You wouldn't get it all, but you wouldn't get any without the partner.

Joe Villeneuve · Answer

You're on the right track...just not making the right connections...yet.