I have a deal that I am working on and wanted to get some ideas. The house is listed at $144k and ARV is $160k. In order to get a cash on cash return of at least 10% I need to buy at $120k. House needs new paint and drywall but in overall good condition- lets say $5k for repairs. My dilemma is this:
I can purchase the home with cash if I need to but I understand the value of leveraging OPM. Should I just pay cash for the property so that my offer is more likely to get accepted(this is a foreclosure) or should I just finance at 20% down? It is my understanding that I would be able to pull my equity out of the home by doing a Home Equity Loan so why wouldn't I just pay cash now and the refinance later to get my cash out of the home?
Let me know your thoughts.
@Benjamin Andrew Pogue Cash offers are generally stronger than financed offers. You'll need to show proof of funds. The seller will not have to worry about your lining up financing or a bank requiring certain repairs prior to close.
But be sure you can do a cash-out refi after you close. This is a mortgage, not a home equity loan. Many banks have a seasoning period, meaning they will not want to let you refi until you've had the property for 6 months or a year.
All that said, a 10% cash on cash return either with a financed offer or after a refi is not very attractive. If you are 100% sure it is worth at least $160K after $5K of repairs you might consider flipping it, though it would be better at $115K or lower.
Thanks for the reply Larry. Very helpful information. What is a good cash on cash return to shoot for?
Keep in mind, this is a new property built in 2010 but has been vandalized inside. Comparable rents are $1450.
I'm not a 2% rule guy, or a Cashflow is Always king guy, but $1450 for rent on $125k all-in price means, to mean, you're betting on appreciation a bit. How likely is appreciation in your market?
For your original question, paying cash to get a better price, fixing and the re-fi'ing is exactly what I do. Larry covered the essentials.
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