There is a deal on the market for a little over $300K on an abandoned property that I am EXTREMELY interested in and the seller only wants cash. I am pretty confident and I can ask my immediate circle for a loan to acquire the property. I have already been in talks with a lender on a construction loan, but my question is: How do you pull that cash back out to pay back the $300K private money?
Let's say I get it for $300K, I put $200K in it appraises for $600K. When I refinance into a traditional 30 year fixed, the bank will only loan 75% or 80% LTV ($120K or $150K).
Long story less long, if you all were to find a $300K deal that you loved, how would you go about paying back the private money you received to acquire the property?
The key is to know your numbers before you buy. Because if you pay cash for something, and need to pay it back, you want to buy it cheap enough where you can get a "cash out refinance" on the property after you fixed it up.
Let's pretend your numbers are real.
If ARV is $600,000 and you generally follow the 70% rule, you multiple 600,000 by .70 and get $420,000.
Then you need to put $200,000 of repairs, so subtract 200,000 from 420,000 and you get $220,000.
This is the max amount you could offer on the property to get your cash back out, and you're not even factoring in closing costs and holding costs. So $300,000 is too much I think if it'd need that much repair costs.
When doing a cash-out refinance, they'll give you anywhere from 75-85% of the appraised value. So, let's say it did appraise for what you expect of $600,000 and they'll give you only 75% of that. That is $450,000 they'll give you in cash (which you'll pay back over a mortgage loan term). But if you spent a total of $500,000 ($300K to purchase and $200K to fix up not including closing/holding costs), then you're still short by $50,000 in the end.
So you need to negotiate numbers that work up front so you can pay back your private lender(s), have a bunch of cash of your own to bridge the gap, or walk from the deal.
But this is assuming you borrow ALL the money. Are you saying you have the $200,000 repair money? If you have the repair money yourself, then an ARV of $600K cashed out at 75% would pay off your private loan of $300K and then some.
@Nicole A. Appreciate the response. So I was confused on the refinance part. They give you 75%-85% not the other way around. So technically, in this scenario where I am only looking to borrow $300K of private money, I would be able to pull out $450K to pay back the $300K I borrowed. Thanks!
The situation with me is that I have about $150K that I have saved up, but this property that I REALLY like is listed around $320K and isn't financeable. The listing says they are only accepting cash offers and I think I have some people I know that would probably let me borrow the money. So hypothetically speaking, I want to negotiate the seller down to $300K cash for the property and then use a construction loan to renovate the property. Once the property is completely renovated, I want to be able to do a cashout refinance and pay the $300K back to my friend(s).
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Join the Largest Real Estate Investing Community
Basic membership is free, forever.