I'm looking for a little help with my next potential deal. Here's the numbers. Purchase price will be $60k with an ARV of $115k. Rehab costs will run $20-$25k. I currently have a HELOC for $33k on my former primary residence which is now an investment property. The home has $100k in equity so my first choice was to just expand that line of credit which would give me enough for purchase and rehab and then I could do a cash out refinance on the new property and pay off the HELOC. Sounds easy enough but the bank doesn't want to play along since this is now an investment property. That being said I have a couple more options.
Option #1: Do a cash out refinance on the property with $100k (property #1) and I would be left with the $60k needed for purchase but nothing for rehab and I don't have enough cash to handle this so I'd have to rely on 0% interest credit cards, some cash, and maybe some other type of line or credit or loan with a higher interest rate. The upside to this is I'm currently locked into a 30 year 6% interest loan and the new loan would be a 15 year 3.5% so my monthly payment would only be about $300 more and I'd get the second property and I'd have a 15 year loan. Bad part is I lose my $33k line of credit which could be used in the future and I wouldn't have immediate funds for rehab. I'm also not crazy about owing twice as much on this property because I have some tax benefits if I sell it within 3 years since it was my primary residence. Not a huge deal because I probably won't be selling it.
Option #2: Use the $33k HELOC I currently have and get an additional business line of credit or hard money load at a higher interest rate. Purchase the property and complete the rehab and then refinance the new property to pay off rehab costs. At this point I have the choice to refinance property #1 with a lower interest rate and I have the two properties separate of each other. The bad side to this would be higher interest during the rehab phase and more potentially more closing costs since I'll be refinancing two properties.
Since this is my first time having to get a little creative on financing I just want to make sure I don't set my self up for failure.
@John Lewis Your numbers are almost identical to a purchase + rehab I once did. I ended up approaching a small local bank in town and talked to the commercial lending department.
They approved the purchase money ($50k for me), plus $25k rehab funds. I needed 20% down on the purchase price (10k down). ARV was $110k. In the end I was all in $65k for the purchase + rehab (40k + 25k)
5.25% rate, 20 year term. 1 point only.
Something to consider at least outside your other 2 options.
Hope that helps,
@John Lewis I feel like I'm missing something here...why not just use hard money? 70% of $115k = $80k...which is exactly how much you need to buy and rehab this property. Out of pocket cost to you would be next to nothing. Then refinance out immediately. Is there a reason not to do that?