I have an investment property free and clear. Now what

18 Replies

I recently exhausted most of my personal money to purchase and rehab an investment property. The rehab is complete and will have a tenant very soon. I would like to acquire my next property but I am now left with little personal money. I have been told by several lenders that I do not have enough income (I have worked as an independent contractor with inconsistent income since recently graduating college)  to support a refinance of my first property to get my money back out of the property. I have reached out to several private money lenders who seem to be willing to lend but I am hesitant to take their money at such high interest rates and unsure about which loan is best for me. I would also prefer not to invest with a friend or family member at this time and keeping the property free and clear to just accumulate the rental income isn't going to immediately help me get my next property. What are my best options?

Hi David

I am in the same exact position as you. It is very frustrating to have alot of equity in them or even paid off but banks dont care and wont loan any money based on my income. Would like to hear what others think or how can help us..

Thanks

Finding deals. Best option. **** Everything else. Find deals. Invest in finding deals.  

Use the money from the rental income to fund your marketing campaign, to find deals. 

Use what you have, to get what you need....to get what you want.

Do you know what you want?  This is not easy to answer all the time, I know from doing it.

I agree with @Mike Osterman , that you have to forget everything else.  Focus on saving and sharpening your skills at locating great deals.

I was in the same situation a few years ago.  I know there are ways to go from middling income, depleted cash reserves (because of recently rehabbing a property,) and credit crunch, to getting a second property quickly.

In my case, I exercised patience.  I saved more cash, paid down what debt I had, and got myself in position to get a second property when the time was right.  

If your income is unsteady, I think it may make more sense for you to let this first rental mature a little before taking on more debt.  If the worst happened and you had two vacant properties, it might be difficult to pay the debt incurred from buying the second property and the debt from rehabbing it.  You're in a very good place now.  Use the next several months to save cash and hone your deal-finding skills.  

With the hunger you have, you'll get another good property when the time is right.

Thank you for the quick responses. Just some additional context. I also own another property that has been rented for the last 6 years which helped me get this second property. My income has been inconsistent but when it does come in it is substantial enough for me to live comfortably.

Randy - If I were able to take on more debt I would because even if both properties were to be vacant for a month or two (or longer) the mortgage payments are a joke. I would have an estimated mortgage payment of about $180-$200 a month on this property and the taxes for the year are $450 which I have already paid in full. Obviously I have other expenses like insurance, repairs, management, etc, but I am perfectly capable of sustaining a vacancy hit for a few months if that were to happen. I feel like if I am not moving forward on the next house I am moving backward haha

@David Z., understood.  Sounds like you're in a great position!

Given your parameters, you may want to rethink buy and hold and focus on flipping until you can build enough profit to buy and hold and still have funds for the next one.  If there is already a tenant in place, then that will be difficult.   It may be that you will need to wait and build up savings for the next one while being able to show 2 years of solid rental income to help boost your chances for conventional loans.  But if you have yet to sign a lease and can sell for a nice profit after your rehab, then hopefully you can repeat the process until you have the funds necessary for a buy and hold and funding the next flip. 

@Lynn M. I would love to eventually get into flipping as well. However, the "rehab" I have done on this property wouldn't net me anything if I were to sell it. I would actually lose money. I basically slapped paint on everything and made it habitable to get a tenant in there. Furthermore, the only people buying homes in this particular market area are investors who aren't looking to pay top dollar for a "rehab" to add to their portfolio. Which brings me back to trying to find some creative financing to get the next property for B&H or flip.

Your best bet is to find a partner with the credit you need on a temp basis.  I know you said you prefer not to, but as I see it this is your best option to get to your stated goals.  Here is how it works, and why it would only be temp.:

1 - Credit Partner comes in to refinance this deal.  You share the wealth.  Keep in mind your goals, and you'll see that this option will get you there pretty fast.  Note that properties must cash flow the amount you need, or use a different property.

2 - Use cash you get out to buy the next deal.

3 - Repeat steps 1 and 2 with same (or different) credit partner.

This will get your to accumulate cash flow properties.

Here is how the "partnership" can become temporary.  Two ways:

A - Use "cash out" funds to buy out credit partner on properties.  If you can "cash out" on the refinancing, after a few refis you might be able to pay off the mortgage on a property and get 100% possession of one at a time.

B - Build up income from your Cash Flow from accumulated properties to now be able to qualify for your own refinancing.  Now just refi out the refi's one by one, of the previous properties, and pay off the credit partner(s).  Now you own all of them 100%.

Don't dismiss partners as a great tool.  They fill in where your "gaps" are in your plan...at least until you can fill that gap yourself.

@Joe Villeneuve

Thank you for your suggestions! I hadn't considered either of those options. I have to admit both make a lot of sense to me.

Let me ask you. If credit partner was to invest nothing but their name in order to secure the refi and I agreed to share say 40-50% of the monthly rental income with them for doing so, How would the buy-out or pay off amount be determined for each scenario A and B? Or is that something we would agree upon from the start.

Originally posted by David Ziccardi:

@Joe Villeneuve

Thank you for your suggestions! I hadn't considered either of those options. I have to admit both make a lot of sense to me.

Let me ask you. If credit partner was to invest nothing but their name in order to secure the refi and I agreed to share say 40-50% of the monthly rental income with them for doing so, How would the buy-out or pay off amount be determined for each scenario A and B? Or is that something we would agree upon from the start.

 It's based on what you would agree to.  It can be based on just the accumulated cash flow earned, it can be based on a lump sum, or it can be based on a % (same as the % of cash flow they would get) on the refi that takes them out of the picture.  Here is what I mean:

$100,000        House is worth
$ 70,000        Cost of buy/rehab.etc...
$ 70,000 Initial refi (70% ARV)...$504/month (CF = $300); 50%=$150/month

After 6 months, refi again at 75% ARV (longer amort.)...$350/m (CF-$450/m); 50%=$225/m

After 2 years (# of years is open), you can refi on your own and take th4 credit partner out.
$112,000       House now worth
$ 84,000 75% ARV refi
$ 70,000        Payoff existing loan
$ 14,000        Cash out at refi
$   7,000       50% of Cash out to credit partner you are buying out.

@Joe Villeneuve

 One more question. Why wait 6 months to refi at the higher %(longer amort)? Why not do that with the initial refi?

Originally posted by David Ziccardi:

@Joe Villeneuve

 One more question. Why wait 6 months to refi at the higher %(longer amort)? Why not do that with the initial refi?

 The initial refi is actually a Loan of Credit that I can get at a one time $175 fee right away.  The terms are 70% arv; 3.625%, 15 years.  The 15 years make the payment higher, but the ability to get it right away is worth it since I can put those funds back to work immediately (actually more than once) during the 6 month seasoning period required to get the 2nd refi.  The 2nd refi terms are better for long term holding.  75% arv, 4.5%, 30 years.,,and, the extra 5% gets me more of my equity out and working for me instead of being "lazy" locked up in the house...so to speak.  The 30 yr vs. 15 yr amort period reduces the monthly payment quite a bit...even with the extra 5% on the loan.

@Joe Villeneuve

Ok thank you. That is an interesting strategy. I like that each refinance serves a different purpose so to speak. Thanks again for the tips Joe I really appreciate it

@David Z., have you considered creative financing? Sub2, lease options, seller financing? If done correctly, they are far less cash intensive and offer a lot of flexibility which is ideal for someone with limited working capital.

What banks have you talked to?

You may have to talk to a number of them, but you often get a different answer from small local banks than from larger chains. Once I established a lending relationship with a 3-location local bank, I've been able to do cash-out refinances numerous times. Especially if you own two properites free and clear, you may be able to find someone to work with you.

That depends 

Sorry, hit Post too soon. Final sentence was going to say "That depends on how spotty your income is."

@Shaun Caldwell I am still educating myself on creative financing strategies. Any recommendations on websites/books, etc?

@Michael Hayworth I've spoken with several banks both big and local. I think my best strategy now is to stabilize my income and eliminate some of my existing debt like student loans and refinancing the mortgage on my other property since interest rates are so low at the moment. Just frustrating to not have the capital to go after the next one when I have a property sitting free and clear. Patience is a virtue I guess!

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