I am looking to buy my own home (Not for renting purposes). I am interested in buying a foreclosure/fixer upper properties that I can put rehab dollars into, to create some equity and get into the certain area for cheaper than buying a ready to move in property.

Now, I have the cash to put down 20% on the property, but I do not have the additional cash to provide for the rehab costs. I now need to find a hard money lender so I can fund my rehab budget. Lets get to some numbers as an example.

Say I purchase a 3 bed, 2 bath fixer upper home for $190k. I put in $38k for the down-payment

Rehab costs $45k.

Looking at comparable properties, I assume a ARV of 270k.

For the sake of this example, lets say I refinance 75% of the bank appraisal of 270k, which leaves me with 203.5k.

Using the 203.5k to pay off the original loan remaining amount (152k after downpayment) and the hard money loan ($45k+ $5k interest) just about leaves me with nothing leftover.

I now have $38k of my own money and a loan for $203.5k, giving me a house cost of about $240k. Considering the ARV, that's $30k equity gained, a remodeled house that's designed per my vision, and only $38k of my money rather than $54k (20% of 270k).

Am I overseeing something here, or would this be a viable strategy? I also have someone close that I can borrow hard money from for relatively cheap (~6%), so that plays more into my favor. Your insights are very appreciated!!

That would work but you could also just do an FHA 203k and not have to refinance at all.

@Aaron K. I have considered the FHA 203k loan, but I've read that they take a very long time to process/close. Right now, I have around a 3-4 week window to find and buy a property, considering a 45 day standard closing period (Conventional loan). Do you have any experience with the 203k loan?

@Adam Juodis why do you only have 3-4 weeks?  Generally time limits without good reason can do more harm than good by pushing you into a subpar property.

@Aaron K.   You don't need 20% down if you are buying it to live in it.

Adding value to your own home I think is an awesome plan! I have a friend who buys a home using FHA 5% down. Lives in it and fixes it up, then 2 years later sells it and does it again. Basically no taxes, low down payment, and is always ‘moving up' in terms of their own home.

The only real downside is living in a construction zone (depends on how much work is needed and your personality dealing with it).

Good luck!