Financing a cash buy

8 Replies

I'll soon be financing a duplex that I bought with cash, then renovated. I bought the house as a buy and hold.

The property has appreciated a lot because of the area and the reno, and will likely appraise at a point where, if I finance at 80%, it won't cash flow (using the 50% rule). Of course nearly everything is new so maybe I'll still be ok.

So, I should either sell it, or finance less of the property? I could finance 97% and use the extra cash to invest in other properties - it won't cash flow for a while. For some reason I feel the route forward should be clear but for some reason I don't see it.

That's not a uncommon situation when doing major rehab. Is your goal to develop a large portfolio? Are there other properties available that will cash flow better fully financed?
I would want to have it cash flowing $100 per unit after financing. If I could get all the cash I put into it back out and still have it cash flow, that would probably be good enough for me. If that left a lot of equity in the property, like enough for the down payment on a replacement property plus a second property and those deals were available, then I would have to sell.

I'd finance less of it, yes. Enough to cover your fixed expenses plus $200+ in your pocket monthly. Then use the money towards another investment property. That's exactly how you do it, just one step at a time.

Thanks Brant. I would like to buy several more properties in the next year/two though I'm not yet sure if I'm going to accumulate what I would call a large portfolio.

If I finance for what I have put in, it will probably cash flow $200+/unit and I will have two or three down payments in equity. Would it be reasonable to finance for a lot more and use that to buy more properties rather than selling and paying the gains?

@Jay M. I think your best option is to seek a line of credit on the property as a second after you cash out at the amount that will allow you to cash flow 200+/mo. You can then use the line of credit (LOC) to make additional purchases or rehabs. That way you avoid saddling your property with long term negative cash flow. You pay back the LOCs when you get your long term financing on the following properties you acquire. Just another option to consider.

In my opinion you should consider 100/mo/unit as the absolute minimum, after deducting P&I, tax, property insurance, 10% maintenance, 10% vacancy and property management if you use it. I would not finance it out farther than that. Use that money to buy the next 2-3 properties. At that point if you think you have too much equity locked up in the first property you can sell it, but only if you didn't have a problem finding the other 2-3 better investments.

I agree with the others, don't max out the financing. Pull out just enough to allow this one to still cash flow. That may not be enough to cover several more properties, but should be at least enough to purchase 1 more, do the same you did here, then on to the next.


@Robert Leonard I hadn't considered using a LOC, this might give me more flexibility. If I didn't find additional properties then I wouldn't be stuck with cash I can't use. I'm feeling more comfortable with the idea of having a lot of equity in the property.

@Brant Richardson @Scott S. @Annette Hibbler If I pay myself for the work I did on the property, adding that to the costs of acquisition and renovation, and deduct PITI, 10% for maintenance and 10% for vacancy/etc., then I would cash flow at least $500. I would be left with a ~35% equity position and enough cash to expand.

The point that many of you have made, and that I neglected: do I have good deals to use all that leveraged money. Probably not. Thanks!

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