Need advice on financing rehab for investment property

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Need advice on financing rehab for investment property

Bryan Liu
Member since 2023 · 2 posts · 2 votes

I am trying to finance my repair and renovation for a duplex investment of 2500 sq ft property that I recently purchased. This property is in California in the LA area. The repair for foundation and earthquake retrofit comes to $97,000. Updating the interior is costing me $63,000 for demo, installation, and materials. I would provide the vanity, bathroom tub and shower, kitchen cabinet, flooring, and all the hard wares. I think I would need to borrow at least $190,000 or more to complete the rehab. Luckily, both unit is vacant and I'm looking for options to finance this rehab. Looking to rent both units as long term once completed. 

I have tried going through the conventional route of HELOC and Home Equity Loan for my primary residence. Both side said that my DTI was too high and I wasn't qualify to borrow. I was told from a rep that if I could get someone to sign a lease agreement for about $3,200 - $3,600 per unit, I would qualify. Or, put my rental property in an LLC. My mortgage lender said they aren't able to do this and sent a letter saying it's not possible. Currently, asking some of my close friends to help sign a lease agreement with me. I provide them with the rent amount and they write a check in their name.

My wife and I with my VA disability make $64,100+$88,608+$17,840=$170,550 or $14,212 a month or less. Our debt include only our primary, the duplex, and credit card $3,175.91+$7,317.49+$2,000=$12,493. If we take the minimum for credit, it will be $100 instead of $2,000 or less.

We have stock portfolio that we don't want to touch for the rehab around $200,000 that is liquid upon selling. 

I been researching hard money lender, but struggling to find one that meet our needs. If you have any advice please leave a post and if you have a reference to lender that meet our needs please message me. If I am missing any information that could help our case let me know so I can include it in when talking to lenders. 

Please let me know if I should include a location for this post, if that helps.





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Malcomb StapelPro Member
Investor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
2y

@Bryan Liu this isn't going to be what you want to hear, and it will sound like I'm being harsh. But, the situation you spelled out raises a lot of red flags. 

You bought a duplex recently bud didn't have a solid plan in place to finance the repairs. Now your trying to figure out the renovation money after the fact. 

You might have your friends sign a lease and cut you a check. This is also known as a "magic lease" and it will qualify you for mortgage fraud if you are caught. Just be aware and be careful. 

You are talking about making minimum payments on your credit card to help finance repairs and according to your numbers the mortgage on the duplex is already at half of your monthly income. 

Honestly, the picture you painted sounds like a disaster. It's possible you could take the loan to another bank that is willing to do purchase plus rehab, but there is likely a seasoning requirement. The real play here might just be to take a step back and evaluate if this deal is going to actually set you up, or ruin you financially. 

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    2y

    @Bryan Liu "The repair for foundation and earthquake retrofit comes to $97,000." - How much experience do you have repairing and remodeling RE? 

    "Currently, asking some of my close friends to help sign a lease agreement with me. I provide them with the rent amount and they write a check in their name." - So a fake lease agreement trying to show rental income? This reads like fraud. 

    You shouldn't drain $200k from a stock portfolio to get this deal done. Unless you bought a homerun deal I'd never consider it. Retirement account? Early withdraw taxes really hurt. 

    2Reply
  • Malcomb StapelPro Member
    Investor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
    2y

    @Bryan Liu this isn't going to be what you want to hear, and it will sound like I'm being harsh. But, the situation you spelled out raises a lot of red flags. 

    You bought a duplex recently bud didn't have a solid plan in place to finance the repairs. Now your trying to figure out the renovation money after the fact. 

    You might have your friends sign a lease and cut you a check. This is also known as a "magic lease" and it will qualify you for mortgage fraud if you are caught. Just be aware and be careful. 

    You are talking about making minimum payments on your credit card to help finance repairs and according to your numbers the mortgage on the duplex is already at half of your monthly income. 

    Honestly, the picture you painted sounds like a disaster. It's possible you could take the loan to another bank that is willing to do purchase plus rehab, but there is likely a seasoning requirement. The real play here might just be to take a step back and evaluate if this deal is going to actually set you up, or ruin you financially. 

    2Reply
  • Noah WrightBusiness Member
    USA, Nationwide · Member since 2024 · 174 posts · 90 votes
    2y
    Quote from @Jaron Walling:

    ... So a fake lease agreement trying to show rental income? This reads like fraud...


    Mortgage fraud is investigated by the FBI and punishable by up to 30 years in prison and/or a fine of $1,000,000 --- (link)

    Bryan, there are perfectly legal solutions to your problem, call anytime.

    [email protected]737-773-3717
    1Reply
  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    2y
    Quote from @Bryan Liu:

    I am trying to finance my repair and renovation for a duplex investment of 2500 sq ft property that I recently purchased. This property is in California in the LA area. The repair for foundation and earthquake retrofit comes to $97,000. Updating the interior is costing me $63,000 for demo, installation, and materials. I would provide the vanity, bathroom tub and shower, kitchen cabinet, flooring, and all the hard wares. I think I would need to borrow at least $190,000 or more to complete the rehab. Luckily, both unit is vacant and I'm looking for options to finance this rehab. Looking to rent both units as long term once completed. 

    I have tried going through the conventional route of HELOC and Home Equity Loan for my primary residence. Both side said that my DTI was too high and I wasn't qualify to borrow. I was told from a rep that if I could get someone to sign a lease agreement for about $3,200 - $3,600 per unit, I would qualify. Or, put my rental property in an LLC. My mortgage lender said they aren't able to do this and sent a letter saying it's not possible. Currently, asking some of my close friends to help sign a lease agreement with me. I provide them with the rent amount and they write a check in their name.

    My wife and I with my VA disability make $64,100+$88,608+$17,840=$170,550 or $14,212 a month or less. Our debt include only our primary, the duplex, and credit card $3,175.91+$7,317.49+$2,000=$12,493. If we take the minimum for credit, it will be $100 instead of $2,000 or less.

    We have stock portfolio that we don't want to touch for the rehab around $200,000 that is liquid upon selling. 

    I been researching hard money lender, but struggling to find one that meet our needs. If you have any advice please leave a post and if you have a reference to lender that meet our needs please message me. If I am missing any information that could help our case let me know so I can include it in when talking to lenders. 

    Please let me know if I should include a location for this post, if that helps.






     Hey Bryan, 

    If you are in search of a non traditional business purpose loan there are DSCR based 2nd Mortgages (Must be an investment property) Or Hard Money 2nds on Primary Residence (Funds must be used for business purpose). I would advise first trying to qualify with a conventional HELOC as this will be less costly.

    [email protected]818-269-7983
    LuxePrivate Investments LLC 572 Reviews
    WebsiteView Page
    0Reply
  • Perry FarellaPro Member
    Lender · Chicago · Member since 2024 · 15 posts · 10 votes
    2y
    Just to post another idea here, might there be a way for you to occupy this duplex as your residence ?  If so it may be possible to get a better term, lower rate, owner occupied rehab loan rather than as an investor who would never live there. I have done it before. Happy to answer questions.
    0Reply
  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    1y

    Even if the credit card debt was $0, your DTI is way too high to qual for any new traditional/conventional loan until the units are rented.If youre going to keep this duplex, I'd focus on getting one of the units in service as fast as possible.

    It sounds like there is currently a decent-size lien ($7300/month) on the property. Finding hard money could be tough unless the ARV is crazy high as you'll be asking them to put $200k in 2nd position or to buy out the first and add $200k to the balance.

    Depending on which brokerage you use, you could possibly borrower against your securities holdings with a line of credit (similar to a margin loan) if it's not a retirement account. 30-35% of the balance would likely be within reach, but make sure you FULLY understand margin calls and when they would trigger. This would likely have around the same cost as hard money.

    Another thought - assuming you're able to find hard money, what's your exit plan? I hope you have verified that there will be sufficient equity and that you'll be able to qualify (either DSCR or Conv) for a takeout loan or cashout refi for the hard money. If not, I would probably look at selling now or finding an equity partner to bring some cash into the deal to get it across the finish line.

    0Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    1y

    A couple of things.  One. It looks like the payment on the duplex is 7k a month. Is that correct? That means you spent about 1.6 million assuming a 25% down payment - leaving 1.2 million loan at 7%. But here's the critical question and answer :
    How much did you actually pay for the duplex. How much do you owe? How much will the duplex appraise for once its fixed up?

    Noone here can give you any legitimate response without knowing the answers to those three questions.

    If you paid 1.6 million and put down 25% and now owe 1.2 million and the duplex will be worth 2 million dollars when its complete, then you can easily get a hard money lender to lend you on the property.  But they're going to require you to refi the entire amount (i.e. they'll refi the existing loan of 1.2 and add the 200k for rehab for a total loan of 1.4). 

    They are not doing a heloc for the rehab amount and ending up in second position.  They have to be in first so they'll have to refi the existing mortgage you have plus add the rehab.  But that also requires the total loan amount (refi of the existing mortgage plus 200k for rehab costs) to be less than 70% or 75% of the total value of the duplex after its repaired.

    btw: I hope you can rent each side out for more than 3,500  if you just paid 1.6 million and had to put down 400k.  And based on your 7,300 /mo mortgage payment on it, thats what I came up with by assuming 25% down (1.6 purchase, 25% down or 400k, leaving 1.2 million dollar loan) and 7% amortized over 30.

    1Reply
  • Jacqueline Wright
    Lender · Nashville TN, USA · Member since 2024 · 142 posts · 30 votes
    1y

    Bryan, it sounds like you have a solid plan for rehabbing the duplex but are facing challenges with traditional financing methods like HELOC and home equity loans due to DTI issues. You can use a PML.

    • Private lenders, often individuals or small firms, are another option. They tend to be more flexible than institutional lenders and may lend based on the equity in your property or its ARV, rather than focusing on your income or DTI.
    • If you have any connections with investors or family/friends who are looking for safe investments, you might be able to pitch the project to them, offering them a higher interest rate than they would get in traditional investments.

    Advantages:

    • More flexible terms.
    • Negotiable interest rates and payback periods.

    Considerations:

    • You’ll need to clearly outline the project’s profitability and how you will repay the loan, usually through a refinance or sale after rehab.
    1Reply
  • Michael Ohara
    Investor · HI · Member since 2017 · 328 posts · 124 votes
    1y

    Hey Bryan , I have a possible solution for your rehab costs. I'll connect with you.

    0Reply
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