Rehab loan then refinance - best way to go?

Question

I bought a house in 2004. Paid $99,000. Owe $94,000 today. It should appraise now for around $115,000-$120,000. In 2004 I was rehabbing it to be used for a daycare center - $14,000 cash flow per month. During the rehab (gutted out almost completely), I was in a bad car accident. It has been sitting gutted since Nov. 2004. I need to finish it and refinance it. I was unable to work in 2005 & 2006, so I cannot produce W2s for the last two years. I do have commercial property (FMV $40-$50k). My broker recommends that I get a rehab loan and put up the commercial property for collateral for a $20,000 loan, then finish the place. After the finish, the plan is to pull the equity out of the house to pay off the rehab loan and then refinance with a 30 yr. fixed rate loan. It is on an ARM. It will cost $5,000 to pay off this loan early. I plan to put it back together to rent out now. It should rent for around $800 a month. My credit is good - 700's. No late payments. I do have another mortgage. Will I have a trouble getting approval on a 30 yr. fixed, since I cannot produce W2s for the last 2 years? If so, do you know of another way to finance this place. I need to do something with it. Thank you for any advice you can give me.

Nancy

Nancy Jenkins · Answer

Thank you, Scott.

Scott Miller · Answer

I'll PM you my further thoughts on this matter.

Regards,

Scott Miller

Nancy Jenkins · Answer

Scott,

Thank you so much for responding to my post.  To answer your questions:

Your current LTV is between 78-82 which places you in the comfort zone for most commercial lenders, but I assume your market assessments are based upon after repair values and not as is values.   TRUE

I further assume that this property is not cashflowing at the moment, and if this is the case, this will be your largest obstacle.  TRUE

Why did cash flow projections go from 14,000 to $800/month?  I was told by a local banker that if I rehabbed the house into a daycare center, I would have a difficult time borrowing money.  He said that a bank looks at their own "risk".  He told me it was less "risky" finding a renter or buyer for a SFR than to find someone to purchase a daycare center, in the event I go under. This property is zoned for either: residential or daycare, church, etc.  The banker (not my mortgage broker) suggested that I sell my commercial property; put $20,000 towards rehab, $20,000 down payment for refinancing and the balance in the bank.  Tried to sell it for a couple of months, but haven't sold it yet.

So my plan changed.  I decided to use the commercial property as security for a loan and just put the thing back together and make it rental property – thus the $800/month rental.  I thought this would help me get the home refinanced easier.  My current monthly payment is $700 – due to go up to $800 in December.

I would prefer to convert it to a daycare.  Even with a small number of children (12) I could pay my employees, draw a salary, cover all expenses, including the house payment and still net over $2,000 a month.  I guess the banker scared me from following my original plan.

A smaller daycare that is licensed for only 20 children is up for sale in Knoxville now.  She wants $425,000.00 for it.  My place is bigger.  My space can handle 35 children (net $14,000 a mo.) and I have enough land to expand and even build more facilities in the future (2 acres).

But I have to do something soon...something smart.  Thanks for any suggestions.

Scott Miller · Answer

Your current LTV is between 78-82 which places you in the comfort zone for most commercial lenders, but I assume your market assessments are based upon after repair values and not as is values.

I further assume that this property is not cashflowing at the moment, and if this is the case, this will be your largest obstacle.

Why did cash flow projections go from 14,000 to $800/month?

In the absense of knowing any of your operating expenses, I question whether your DSCR will be sufficient for any lenders to considerate it.

Your broker might be setting you up for failure---rehabbing a commercial property that doesn't cash flow sufficiently will not avail itself to a refinance arrangement and the collateral you pledged to get 20,000 could transfer hands.

I need to know the numbers before I can say for sure, but I suggest you seek a second opinion before proceeding.

Regards,

Scott Miller