Hard money + refinance = free income property

14 Replies

Hello, I am a new investor and I am pondering a new strategy. If I buy a property from a motivated seller for 80k then refi for 110k because that is what the comps in the area are worth can I keep the property as a rental? What am I missing this idea seems very simple so I wonder if I'm missing something. Any help would be immensely appreciated.

1) If the property truly is worth $110K and its an investment property (vs. one you occupy) you will only be able to finance to 80% of that value.  Maybe 85%.  Maybe less that 80%.  Certainly not 100%.

2) Many hard money lenders require some of your own case in the deal regardless of the values. A few do not. Those typically let you borrow up to 70% of ARV. So, if that property is worth $110K (per an appraisal by the HML's appraiser) you could borrow $77K. They HML will charge points and interest. For a six month loan (usually cannot refi for six to 12 months using a new appraisal) points and interest would be about $8K. You will have some purchase closing costs. So, you might be left with $67K for purchase plus rehab, not $80K as in your example.

3) Rehab is an essential component.  If you pay $80K for a move in ready property, then its probably worth $80K, not $110K.  Its buying a junky property and fixing it up where you add value.

Originally posted by @Jon Holdman :

...

3) Rehab is an essential component.  If you pay $80K for a move in ready property, then its probably worth $80K, not $110K.  Its buying a junky property and fixing it up where you add value.

I disagree with #3. If you only buy off the MLS, maybe. I only buy unlisted properties brought in by our marketing, and we have had many move in ready's at well below market value. Not many investors know it but $2,000 spent in marketing would easily save you $20k off the purchase price of an investment property.

I've heard other people say that, too, @John Horner     I suppose that is possible.  But as soon as you buy a house and it gets recorded, the purchase price becomes a data point for future appraisals.  Even if you truly are buying a house for well under its true as-is value, the new lender may push back on a big value jump.  Much easier to justify the increase if you can provide a list of work that's been done.

I'll add a big value increase without any work was easier during the bubble.  Lenders were burned badly.  I know of at least two situations in this area where a group of scammers bought a few houses in an area at inflated prices.  Then started buying and selling other houses in the same area.  In some cases straw buyers got loans that were never intended to be repaid, using these new value.  In others, legitimate, but niave, buyers bought the inflated houses using loans from brokers using friendly appraisers all working in cahoots.  This is one reason for the arms-length appraisal rules that were put in place a few years back.

AJay,

I think you may asking if you can still keep a property as a rental if you refi at a higher value because you bought below market value.

You need to figure out if the property refinanced will still meet your investment objective and you need to determine if the deal is still a deal with the rehab included. Your objective is not the same as other people's.

Conventional financing rules will determine how much you can refi and appraisals/comps will factor into how much that new loan is. On residential 1-4 units the more properties financed you have, the LTV can become more restrictive. There are also waiting periods for refi as well if you purchased with cash. (the rules change depending whether you have 4 or fewer or over 4 so I can't be more specific off the top of my head).

Say your objective is monthly cashflow, then calculate what income you will or will not receive under the new financing. Also what are the cap rates and cash on cash (with rehab included)? Do these still meet your objective? If the new debt service is taking away much or all the monthly income you want, then you might want to finance less. This all depends on your investment objective (which can change over time as well!). The numbers will tell you your options and then decide.

If your objective is to hold, the deal gives you equity, and monthly income isn't necessary, you can also get a HELOC on that equity so you can access the capital to fund other projects. You need to call around for banks and credit unions who will do HELOCs for non-owner occupieds.

@John Horner  

"many move in ready's at well below market value"

That may be true in Ohio, but I guarantee you that's not the case in DFW.  With inventories where they area, the only "move in ready" property you're going to find substantially below market is going to be in an area no one wants to live.

Just sayin'  :-)

Originally posted by @Hattie Dizmond :

@John Horner 

"many move in ready's at well below market value"

That may be true in Ohio, but I guarantee you that's not the case in DFW.  With inventories where they area, the only "move in ready" property you're going to find substantially below market is going to be in an area no one wants to live.

Just sayin'  :-)

 So you've done your own marketing for motivated sellers and didn't find anything below market value?  

@John Horner  

That isn't what I said.  There are below market deals, just not move in ready below market deals.  Again, you might find one here are there, but you're certainly going to be shocked and dismayed, if it happens, particularly in the areas we're targeting.

@John Horner  @Hattie Dizmond I find below market move in ready deals all the time in my market (Houston) through direct mail. Case in point, I just bought a house for 70k yesterday and listed it on the MLS last night and have an offer accepted for 98k. I spend a total of .4 hrs cleaning the exterior and sent professional cleaners over to give it a quick shine.

@Jon Holdman  

In my neck of the woods the appraisers need to see the sale price on the MLS to use a house as a comp. The sale price of the off-market deals I find from marketing do not get recorded. The deed is recorded so you can trace the transfer, but thereis no sales price recorded.

With that said,  my lender still only finances 85% of the lesser of cost or appraisal.

Originally posted by @David J. :

@John Horner @Hattie Dizmond I find below market move in ready deals all the time in my market (Houston) through direct mail. Case in point, I just bought a house for 70k yesterday and listed it on the MLS last night and have an offer accepted for 98k. I spend a total of .4 hrs cleaning the exterior and sent professional cleaners over to give it a quick shine.

@Jon Holdman  

In my neck of the woods the appraisers need to see the sale price on the MLS to use a house as a comp. The sale price of the off-market deals I find from marketing do not get recorded. The deed is recorded so you can trace the transfer, but thereis no sales price recorded.

With that said,  my lender still only finances 85% of the lesser of cost or appraisal.

 Here you go Hattie, this is what I expected to hear from someone.

What kind of marketing are you doing when looking for leads?  Maybe you need to tweak your marketing a bit go get the deals you want!

I know a full time wholesaler who is always marketing several areas.  I have purchased a couple houses from him that were under market price to me after paying him his fee.  I am happy to let him keep doing his thing and even happier to buy when he finds a property I can use.

@John Horner  

Maybe you're right. That's why we're scheduling a consultation with Jerry Puckett. But, the other thing to remember is that I'm targeting areas with A++ schools. The median ARV in these areas is close to $250k. In several pockets of these areas there is

Like I said, we're having a consultation about our marketing program, which is - admittedly - very young, since we just completed our first mailing and will be sending out the 2nd.  Both the DFW & Houston markets are huge and extremely diverse.  What could be possible in any particular pocket doesn't necessarily lend itself to the market as a whole or to another pocket.  I'm glad you both are finding these deals.

Originally posted by @Hattie Dizmond :

@John Horner 

Maybe you're right. That's why we're scheduling a consultation with Jerry Puckett. But, the other thing to remember is that I'm targeting areas with A++ schools. The median ARV in these areas is close to $250k. In several pockets of these areas there is

Like I said, we're having a consultation about our marketing program, which is - admittedly - very young, since we just completed our first mailing and will be sending out the 2nd.  Both the DFW & Houston markets are huge and extremely diverse.  What could be possible in any particular pocket doesn't necessarily lend itself to the market as a whole or to another pocket.  I'm glad you both are finding these deals.

 Ok that makes complete sense now.  Yeah A++ neighborhoods don't make good rentals here in Ohio.  Even at a substantial discount the property tax would eat you alive and result in negative cash flow.

 @Hattie Dizmond   I second going after the good school districts and also second what @John Horner said about A++ neighborhoods.  It's hard to get those to cash flow well.  Folks around here will move every couple of years if they have to just so their child can go to the preferred school, it's crazy.  But then again these aren't your renters, they actually buy and sell, and probably lose I might add.  Some renters do care about where their child goes to school, so if your rental is in a better school district, chances are it will stay rented.  Plus those that are buying in that school district ends up being a rising tide that lifts all boats.  I am focused on older, quiet neighborhoods that are just outside the city limits (no city taxes!) and in a preferred school district.  

Here in So Cal, it's hard to get a B neighborhood SFH to cashflow. The prices are too high and the rent isn't high enough. I agree with James Mabe - the people who live in better neighborhoods typically are owner occupied or if they do rent, they'll stay a long time. And even though you can't get a positive cashflow, you will enjoy a higher than average appreciation in value.

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