Question: Rehab or Rent and move on?
Hello BP!
Quick Disclosure:
I understand my question may draw an opinionated response and there truly is no "right" or "wrong" answer. My goal is to start a dialogue with experienced investors in hopes of helping me come to a conclusion that aligns with my goals. I'm actively reading BRRRR by David Green, Estimating Rehab Costs / The book on Flipping houses by J. Scott. and spend a lot of time listening to the BP podcasts. So I'm doing everything I can to educate myself as I'm ready to buy a rehab deal.
Some context:
I purchased my primary in San Antonio (China Grove area) 3 years ago with intent for it to become a rental. I'm now closing on my second primary next week and will be leaving the first as a rental. I've started the process to refi my current primary with the intent to cash out some equity to move into another deal. Unfortunately, the house didn't appraise close to what I expected (I blame this on my lack of comps understanding which I've now educated myself on). For clarity here are some improvements I've made to the house to date.
1. Remodel kitchen
2. Fix drywall / Remove old wallpaper / Fresh paint
3. Replace all gold door hardware / fixtures / fans to stainless steel to match paint themes.
Now my question:
I'd say my property is "turn-key" as it can definitely be rented in the state it's in, even without a cash-out I'm removing most PMI and getting a great rate. With the new payment I calculate my gross cash on cash to be 29%. Should I complete this refi and rent leaving the house as-is or should I consider updating floors and bathrooms and attempt to refi again with possible cash out? Based on my readings from BRRRR this wouldn't be smart as I'd be trying to force value that potentially isn't there...especially since I have the funds to move on to another deal. Any experience or advice would be greatly appreciated!
If you made it this far thank you so much!!
- Eric
Many banks right now are really restricting cash-out refinances, because of the added risk that COVID-19 has brought. My primary bank has stopped writing the product (for the moment). My other one told me values are compressed... they usually loan to 75% LTV, but with the current lending situation, they have lowered that number... its like 65 to 70%. So I hope the refi works well for you, but wanted to prepare you for the potential feedback you might get from your lender.
My personal opinion is to Rent and move on without further rehab. Its probably unlikely that the rehab would warrant a significant rent increase. BRRRRing the property is going to cost thousands of dollars itself. Sure, you can probably build it into the loan, but if you are only recovering money you invested into the rehab... why do it? Some is just going to depend on how much you could get out, and what it's worth to you. If you have the money to move on, I would just ride out the current lending situation and refi later if you need to for the cash-out.
Randy
Good points Randy! Luckily my lender is offering 75% but even with the appraisal numbers hurt. I think you're right, no point in just getting my rehab investment back when it'll likely rent fine as is.
Sorry to hear your refi troubles. I'd be glad to give you my lenders info as they seemed to be willing to work with me even during the current state of things. Maybe they can help you?
- Eric
Congrats on turning your first home into your first rental. That's how we got started! No need to make unnecessary upgrades. If you have cash available save it for future repairs and make ready. Our rule with a cash-out refi is to keep a mortgage low enough that the rent will also cover taxes & insurance. Good luck!
Rob thanks for that, hearing I'm following a path as others makes me feel great lol. I like that rule, going to keep that in mind when considering cash outs.
How's the Dallas market been since Covid has hit?
- Eric
@Eric Ruiz
Is the appraisal accurate or is there room to challenge it? Bigger banks have appraisers who are typically more conservative than smaller lenders and mortgage brokers.
Have you already bought your 2nd? Could you heloc (harder to get with covid) your first or second? I can borrow 90% equity on my house via heloc, so that is really nice to have.
Hey Justin,
I did attempt to challenge it but my comps after further review weren't as "close" as the Appraisers. Also, I had my agent run a CMA after the appraiser came back (learning lesson #1, in hindsight, I should've done this first) and agreed he was pretty accurate.
I've never even considered a heloc or looked into it much. I'll educate myself on that, thanks for the information!
Originally posted by @Eric Ruiz:Rob thanks for that, hearing I'm following a path as others makes me feel great lol. I like that rule, going to keep that in mind when considering cash outs.
How's the Dallas market been since Covid has hit?- Eric
Purchase wise its a sellers market, it seems to be a super hot market.
I have sold one house and it was under contract within a week. We just put a second one on the market this Thursday. I had 2 offers, one full price, one over asking, so its also now under contract. We just reupped with an existing tenant for an additional year.
Honestly, we are looking at our whole portfolio, and plan to get rid of most of our properties, load up on cash, and then step back in and start doing some Brrr's.
@Bart H.
That's a great point and option I forgot to mention in my original post. I also considered selling the property and not refinancing. Doing so would give me a good little nest egg to push further with more BRRRR opportunites. I'm seriously considering this. I think San Antonio is the same, I've now how two friends have their properties put under contract in under a week!
Having multiple options with my current home just makes me feel like I didn't do too bad buying it. So while my property didn't appraise at what I would've liked, I learned, and can still keep move forward without concern.
- Eric
Originally posted by @Eric Ruiz:@Bart H.
That's a great point and option I forgot to mention in my original post. I also considered selling the property and not refinancing. Doing so would give me a good little nest egg to push further with more BRRRR opportunites. I'm seriously considering this. I think San Antonio is the same, I've now how two friends have their properties put under contract in under a week!
Having multiple options with my current home just makes me feel like I didn't do too bad buying it. So while my property didn't appraise at what I would've liked, I learned, and can still keep move forward without concern.- Eric
I'd talk to a high powered real estate agent. See what the comps are, and decide if it makes sense to run as a rental or as a flip.
The two houses we were running were rentals that had gone up so much in price that it made sense to sell them. Plus we are tryin to mostly get out of Dallas proper, the city is doing a lot of dumb things.
@Eric Ruiz While the Dallas market remains hot, COVID has made sellers in areas further away from the city more open to negotiating. Right now, we remain one of the few major metropolitan areas with homes first time buyers can afford.
I just received an offer to purchase the duplex rental I'm presently living in. I ran the comps they look good about ARV of $100-$140, but comps doesn't always tell the whole story. I'm placing fillers out to see what the market is for this N.Dallas rental property, to see what it would actually go for, before I put it under contract. any tips or ideas?
@Vernon Watts Congrats on the opportunity! Make sure you understand the taxes. Each unit is taxed separately. Get a copy of the lease for the other unit. There are sellers who will allow a month to month at a discounted price to make the unit appear occupied. You'll also want to get a copy of the tenant's payment history. Do they pay on time? What utilities are covered? Even if they have a Texas lease the owner could have agreed to modifications/exceptions where allowed. Good luck!
Try using Zillow to search for recent sales in the area (they show up yellow in their maps view when you have “recent sales” turned on) to look at other recently sold properties that are similar to yours to see what they sold for. It doesn’t tell you the whole story, but it starts to give you a basis for comps. Always look at when they sold, square footage, etc. You can break it down to dollars per square foot to get to more of an apples to apples size comparison. If you think their offer is high, provide them examples of other units that have sold for less and counter back to them.
Where I’m at I can use the property Appraiser’s website yo run a similar search (recent sales in a neighborhood). That might be a possibility too.
Keep in mind taxes will likely reset after a year... so you may see those go up. But also remember you can probably get at least 50% of your homestead exemption if you are living in it... but you have to file for it.
Make sure they are selling you the whole duplex... not just your half! (It is possible to split them).
Evaluate the expensive things for the property.. the roof, AC, septic if it has that... will they need to be replaced soon? Those are other arguments for price reductions.
Best of luck!
Randy
Hi Rob Lee
I really appreciate your very insightful advise. I will get the documents you mentioned from the owner before proceeding to the next level of, possible purchase. The good news is, I'm one of the tenants.
Thanks so much
Given the whole story I'm partial to renting it. Like you said, doing additional renovations may or may not add significant value. If you can eliminate your PMI and get a solid rent rate, and you already have the financial capacity to take on another deal, this seems like the obvious choice. I'd always recommend holding onto property in San Antonio, especially with the sharp appreciation happening right now.
Hey Stone!
Thanks for that input, really good advice. Here's where I'm at as I've been pondering this for a week now lol.
I have cash for a property ~$50k but I'd be left with little cash for rehab. I have plenty of cards to put funds on but that's always risky considering this will be my first BRRRR attempt. So I'm thinking I'm going to sell the property which would give me somewhere between $20-30k after closing. Which now means I'm sitting with ~$70-80k and be all in on a deal cash. If I did have to leverage some debt it's not nearly what it would be without selling the property. Considering my learnings from BRRRR by J. Scott it seems starting out with a cash deal is the best approach. I've heard horror stories on BP podcast of people who leverage CCs for their first deals and it goes south.
Now I'm on the "hunt" for a property, finding my core 4 (I have a couple agents, lenders in mind). I need to do work to find a few GCs and PMs and of course start finding leads! Any advice is appreciated!
- Eric
BP family
I really thank they responses you guys gave on the opportunity I'm facing. The information given will not only help mw move forward on this deal, but on other foreseeable deals to come. I love it
I meant to say, I really thank the responses, and it will help me move forward on this deal. excuse the typo.