Extensive fix and rent

5 Replies

I'm currently looking at a home in my neighborhood that would be a great flip opportunity.  I had a private money investor that was ready to go in 50/50 but unfortunately he had some health issues to take care of.  I have been searching for a portfolio lender to finance the flip but as most of the forum posts related to this topic have said, this is easier said then done. I did however find a bank that would finance the purchase price/repairs if I held on to the property to rent.  My question is: Do any of you use a fix and rent strategy on houses that need extensive repairs (50,000+)?  If so, how did you finance these deals without having to put up your a signifiant amount of cash in the long term?  I would imagine a cash out refinance would work but I am curious to see if others used this particular strategy or if this is even possible through financial institutions.  My example would be a 110,000 purchase, 55,000 in repairs with an arv of 230000.  The rent would bring around $2100 per month.

We recently finished a $90k+ rehab on a property that we purchased for $69k. We paid for the acquisition and rehab in cash though, so that's not really what you are looking for. We used a credit union to do the cash-out refinance. The rehab took more than six months to complete, so they were willing to use an appraisal on the rehabbed property to determine the amount they were willing to lend. In the end, we were left with about $23k invested in a home worth $205k. We were happy with that result.

@Tim Mensch

Do you have any other assets which you might be able to take a loan against? For instance, let's say you had $100k in stocks in your brokerage account. You don't want to sell the stock because you lose the opportunity for upside. But you want the asset to provide some liquidity to take advantage of this deal. And interest rates are so low, the that liquidity is fairly cheap. Depending on the institution, you might be able to take out a loan against that $100k "asset". You'd likely be able to get ~70% LTV but since this would be an asset based loan the interest rate would be quite favorable (especially compared to hard money).

One other route would be to take a loan out against your 401(k). You can pull out 50% of your balance up to $50k. Since this is also an asset based loan the rates are very low (ATM probably around 4.25%). Most of these loans have either 5 or 10 year terms. In this case you're paying interest back to yourself instead of to a third party lender. Payments are also automatically deducted from your paycheck so as long as you have sufficient monthly income you may not even "feel" the effect of paying back the loan. 

*Not an attorney or tax advisor so please don't take the above as advice or legal guidance :) These are just techniques I have had success with in the past. 

@Stephen Chittenden

Stephen, Was the 23k you invested gained back with the cash out refinance? For my particular situation, I could borrow money from a relative (along with some of my savings) for the down payment/closing for the original loan for the purchase/repair. That loan total would be 170,000 (purchase/repairs) on a house with an ARV of 230,000. Could I then cash out refinance for around 200,000 in order to give my relative his investment back along with extra money for his interest and a down payment for the next rental property? The new 200,000 loan would still produce a cash flowing rental. Thanks for both of your answers, I'm just a little confused on the whole cash out refinance process.

Originally posted by @Tim Mensch :

@Stephen Chittenden

Stephen, Was the 23k you invested gained back with the cash out refinance? For my particular situation, I could borrow money from a relative (along with some of my savings) for the down payment/closing for the original loan for the purchase/repair. That loan total would be 170,000 (purchase/repairs) on a house with an ARV of 230,000. Could I then cash out refinance for around 200,000 in order to give my relative his investment back along with extra money for his interest and a down payment for the next rental property? The new 200,000 loan would still produce a cash flowing rental. Thanks for both of your answers, I'm just a little confused on the whole cash out refinance process.

No. The $23k is the amount we could not get back out when we financed the property. We spent $169k (roughly) and although the house was worth $205k, the credit union would only finance it at 75% LTV. That left us with a loan of $153,750. There was then another $7k or so in escrow prepays and closing costs. That left us with about $146k in loan proceeds. The $23k is the difference between the amount we spent and the amount we got in cash-out financing.

In your case, IF the home appraised at $230k, we would not have been able to get a loan for more than $173k (roughly). After closing costs, that would get you down to about $167k or so in loan proceeds against a cost of $200k, leaving about $33k trapped in the property. You might be able to find someone to finance at more than 75% LTV and reduce the amount of trapped cash depending upon your circumstances, but it may not be easy.

That is exactly what I needed to know before going on a hunt for a bank that offers the cash out refinance option. I'll have to look for one with a higher LTV. Thanks again.