What financing strategy to utilize to acquire properties?

15 Replies

In the past I utilized an FHA loan to purchase my first investment property which is a 4-family I also live in. My most recent acquisitions have both been duplexes that I acquired using a HELOC and funding minor/moderate rehabs to update the duplexes making them rent ready. I then performed cash-out refinances to pay off the HELOC loans and lock the properties into a low fixed rate mortgage.

The difficulty was, in my own personal experience, doing cash-out refinances is more expensive and the rates are much higher than conventional financing.  So, I'm wondering if there is another strategy to utilize moving forward to acquire a property that may need moderate rehabilitation using financing???

Doing cash out with conventional financing is typically similar rates you get with a conventional purchase loan. So it shouldn't be more expensive unless the market moved up between the time you bought and the time you've refinanced for cash out. If a regular refinance is say 4.125, a purchase or cash-out refinance will be about 4.25 or 4.325. That's usually only a difference of $7/mo for your avg small home loan.

The expense is probably a broker trying to get a piece of your equity by charging too many points. Find a new broker or stick with a good bank. But don't be discouraged to try a conventional loan for up to 10 properties.

Thanks for your response @Robert Sepulveda I believe that's what I encountered with cash-out refinance financing. Would it be possible to attain conventional fixed rate mortgages on investment SFH & 1-4 family multifamily properties that are not livable? -ie, they may require mild to moderate rehabs? Or is my only option to acquire the properties....rehab and then perform the cash out refinance?

Banks and mortgage companies are going to require a standard appraisal inspection that will need to show everything works. So no missing kitchen cabinets, sinks work, toilets flush, etc. But it doesn't have to be pretty. So, if you have a 1950's property that is ugly but functional, bank financing is a viable option. 

However, if the roof is bare in spots, water damage shows, flooring is missing or is a hazard, etc. etc.,  then you're best off with private/hard money. You'd only want to use bank financing if you're going to hold the properties for long term investment. No flips.

@Rick L. I've used a Master Lease to acquire a large apt community that needed some work. I recommend looking at that as well. 

Originally posted by @Joe Fairless :

@Rick L. I've used a Master Lease to acquire a large apt community that needed some work. I recommend looking at that as well. 

 What is a Master Lease?

This post has been removed.

@Edward B.

This sound nice and all but - why would anyone who owns the Multi relinquish it to another when the profit is then going to that person.

I see more to read on the web site....I'll do that and maybe the light bulb will illuminate. :)

@Daria B. ,

Motivated seller and/or tired landlord. Didn't know what they were getting into, ran the property into the ground because they don't know how to manage, or how to manage property managers. Maybe they inherited the property and don't know what to do with it.

Bottom line - they just want out. Their phone is blowing up with tenant and maintenance problems. Expenses are piling up. They might be in danger of losing the property to foreclosure. Then you swoop in to save the day.

You throw them some money for an option to buy at a sweetheart price down the road and for merely leasing the property to you for a steady monthly income, you will take all of there problems away. They have some money in their pocket and steady income and you handle the headaches.

Then you begin the work of turning the property around. Since you have the option to buy for your sweetheart price you will reap any financial reward for your hard work and expertise.

At least, that is the ideal scenario. It is much more difficult in execution.

It's not any different than someone selling their house to a wholesaler or fix and flipper. They don't have the where-with-all or expertise or means to do that kind of work themselves. So they trade their equity to be done with it.

@Edward B.

The site is an interesting read and I saved the url to read through later - (moderators removed the link here :/).

For all that is appears to be, one would have to have energy to dip into such a transaction. It's a way to acquire property - getting feet wet so to speak - time trials and then make a decision on whether to try and buy. Sellers have to be greatly motivated though - and when it's turned around - sellers may want to keep it after it was "cleaned up for them".

@Daria B. ,

That's weird because I copied that link from another post. Oh well.

If you have an option to buy then the owner cannot refuse to sell to you. If done properly and legally you have purchased the "right" but not the "obligation" to purchase the property at the stated price. If you choose to exercise your right, they cannot legally refuse.

@Pearline Hardy and @Daria B. , a Master Lease is when you take control of a property and have an option to purchase it at a set date in the future. You receive all the income and pay all the expenses during the period. In my case, I also received the equity from the principal paydown on the mortgage which was about 15k a month so I am building equity every month the mortgage is paid. 

As with anything, there are pros and cons to doing it. From a high-level, the pros are: 

- you can get into the deal with as little money as you can negotiate with the seller 

- this is a great strategy if there is a pre-payment on the mortgage because it doesn't trigger it since you're not technically buying it (just make sure you get approval from the lender that they're fine with you doing this. Some people don't get written approval - I do)

- you can be as creative as you want with the terms 

The cons are: 

- you don't own the property so it can make it a little more complicated to sell 

- sellers who aren't familiar with it might shy away

@Rick L.  For $417K+ there are non-conforming delayed financing loans which are priced as purchase. You have to get the process started within 90 days for cash purchase.

For the conforming loans, delayed financing is viewed as cash-out by Fannie/Freddie.

If the ARV is expected to be close to the appraised/purchase, then you might consider doing the purchase with a loan.

Upen Patel, Mortgage Banker

Federal NMLS# 1374243

Thanks @Joe Fairless . So how is this different than a lease option, or is it virtually the same thing?

@Pearline Hardy it's probably the same thing - it's also called a land contract - depends on the state 

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