How should I fund a rehab?

Question

Hey everyone!

I'm looking to purchase a house out of state to use as a rental. I live in Illinois, and am looking to purchase one in Indiana.  The home will cost around 8-10K, and the rehab will cost another 10-20K. I would like to purchase the home with cash, but do not have enough to fund the rehab. Does anyone have any creative financing ideas, or advice, or any other ways you think I should go about doing it?

Thanks in advance for the replies!

Shawn Holsapple · Answer

I like to use the big box stores [Lowes, Hiome Depot, Menards] in-store credit to fund my rehab until I can do the BRRRR strategy and refi.

One can also use "0% Balance Transfer" Credit Cards to fund it as well.

I hope that helps.

Micki M. · Answer

@Shawn Holsapple made a great suggestion, I love using my Home Depot project loan. Another option if you're not pressed for time is to pay cash and then take out a line of credit against the property for the rehab funds.

Steve Vaughan · Answer

I wouldn't touch a cc or box store credit loan with a 10-ft pole these days, but remembering where I was starting out, I utilized all those low interest credit options.  Pay off in full before the term expires like @Mindy Jensen mentions, though.  That 24%-36% apr will back date and eat your lunch if not @Tony Iaconelli!

Mindy Jensen · Answer

@Tony Iaconelli, another vote for the Home Depot/Lowe's/Menards no interest credit card "loans."

I've used them a lot. The timeframe for the no interest ranges from 6 or 12 months to 24 months. The catch is that if you don't pay them off in full by the due date, you get hit with interest charges for the entire time since you made the purchase.

Note that these are no-interest, not no-payments, no-interest. You still have to make regular payments. I make the minimum payment until the second to the last one, then pay off the whole thing. Nice, 0% loan.

Heather DeGeorge · Answer

Also, most banks now require you to keep 25% in the house (so a max loan of 75% of appraised value) but agreed--make sure you can even get credit for that low of an income property.  We have friends that own a lot of similar properties up in Rockford and Belvidere, IL and they have had to do it the way suggested here: a combination of their available cash and then using credit cards for the rest because they couldn't find anyone to finance any of it due to the low numbers.

We also take 401k loans out.  That gets tricky, but if you have them and you understand the risks involved, they certainly save your credit score and you're paying the interest to yourself.

Be careful about calling your existing cards to get convenience checks.  If they don't send you a 0% offer with checks and you call to ask for checks, they might send you "convenience checks".  The funds drawn with these checks OFTEN (but not always) accrue interest at a much higher rate than your regular purchase rate.  So be careful.  When calling existing cards, simply ask them if there are "any balance transfer promotions available" for you.  If they say yes, ask them specifically if the funds can be deposited to your bank account or if they need to be done to specific credit cards.  Some companies won't allow the funds to be put in your account.

Last--if your bank sends you balance transfer offer checks, be very careful.  They sometimes send you checks with choices of offers:  0% for one period of time or 1.99% (or other low percentage) for a longer time.  Be VERY careful about which checks you use as I have once had a bank claim that I used the check for the 1.99% rate rather than the 0% rate.  I thankfully still had the remaining checks and the letter in the house to prove otherwise.  Going forward, I keep those in the house until my first statement when I check to be sure that the percentage rate is correct.  Harrumph.

Account Closed · Answer

@Tony Iaconelli You can call the number in the back of your cards and ask the sales rep if they offer the convenience checks. If not, you can just google 0 percent credit cards and you should be able to find plenty of them. I had a 740 credit score back then. You can also open an LLC and get Business credit cards as well with 0 % interest. Usually banks will give you somewhere between 12-24 months to pay the credit cards without charging you interest. Keep in mind that if you want a rental, this will hurt your credit score while you still have a high debt on your credit cards. And it will be harder to do a cash out refi with a bank if you max your credit cards. Do you know what's the house ARV? Most banks won't do cash out refi for less than 50,000 so you have to be careful there as well.

Account Closed · Answer

@Tony Iaconelli Assuming you have good credit, you will normally get 0 percent  convenience checks from your credit cards. These are promotional offers and banks normally mail them to people with a good credit score. Once you get these checks, you can deposit them directly under your name to your preferred checking account. They will charge you about 3 % fee of whatever amount you decide to deposit and the limit is usually capped to your available credit line.You can also apply for 0 % credit cards and pay your contractor through square or paypal. They'll also charge you about a 2.7-3.0 % of each amount as a processing fee. Keep in mind checks are more convenient because they directly become cash once you post it to your account. Once you apply to new credit cards you might or might not get convenience checks from those banks. Homedepot has also a credit card that offers either 6 or 12 months interest free on your purchases. I'd rather just apply to bank credit cards since you still need to pay for labor with your contractor but you can also do a combination of both.You also want to keep in mind how comfortable you feel taking a hit on your credit score. My score went down a little over 100+ points but it will bounce back once the credit cards are paid off.

Tony Iaconelli · Answer

@Daniel Moctezuma Thanks for your reply as well!

Tony Iaconelli · Answer

Thank you for the reply @Micki M. If I purchase the house with cash for the 8-10K, how would that work for the line of credit? Would the bank appraise the property as is, then give me a line of credit for 75-80% of the property?

@Daniel Moctezuma How do the 0% convenience checks work? I only have a couple of credit cards and I try not to use them much. My credit score is around 760, although, I don't believe I have ever received anything like this in the mail... I receive card offers for 0% all the time but its only for the first 15 months, then it is raised to 12.99% to 18.99%.

Tony Iaconelli · Answer

@Shawn Holsapple

Thanks for the reply. Can you explain a little more in depth on those tips?

How should I fund a rehab?

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