Finance and Renovate Investment Property

Rehabbing & House Flipping
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Finance and Renovate Investment Property

Corey Byrum
Member since 2024 · 1 post · 0 votes

Hi! Big thanks in advance for anyone taking the time to read this. Please let me know if I can provide more specifics or numbers.

I have an opportunity to purchase a fixer upper in a relatively great location. The opportunity arises after a family member, who has a clean title and owns the home outright, let the property go down the drain. The family member needs the money now and is looking to rent as opposed to finance another home.

I'm essentially playing seller and buyer. I'd like to turn it into a year round rental. I'm willing to leave the property empty for a year to take advantage of owner occupied loans, if that's possible.

Here are my estimates..

Property: 1,355 sq ft, | 3br 2bath | 8,500 sq ft lot
Comps / ARV: 500-560k ~ 530k

Total Needed: 340-400k ~370k
Sale Price: 270-310k ~ 290k
Renovations: 70-90k ~ 80k
Severe cleaning needed (doing myself)
Severe landscaping needed, it's a jungle
I'd like to maximize potential value and be at the top of in-area comps, so would like to do a full gut

Cash on hand: 20k - 30k
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I'm considering,

- Seller financing + separate renovation loan
- FHA 203K (BRRR)
- Fannie Mae Homestyle Renovation (if down payment is below 5%) (BRRR)

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Seller Financing + Separate Renovation Loan

Pros:
Low down payment (via seller willingness) <= 3%
Low interest rate (via seller willingness) <= 3%

Cons:
I'm unaware of how I can finance rehab without a personal loan
Must cash-out refinance to obtain equity, conventional loan rate will not be as good

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FHA 203K

Pros:
Low down payment
Bundles rehab costs

Cons:
Higher interest rate than the seller financed loan
Must cash-out refinance in order to obtain equity and make an investment property

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Fannie Mae Homestyle Renovation

Pros:
Bundles rehab costs

Cons:
Higher interest rate than the seller financed loan
Must cash-out refinance in order to obtain equity and make an investment property

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I may be totally off on what would be optimal here but wanted to provide my current thoughts. Any feedback would be greatly appreciated! Thanks in advance.

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  • Ty CouttsBusiness Member
    Lender · Denver, CO · Member since 2022 · 467 posts · 230 votes
    2y

    Hey Corey,

    Here are some pros and cons of your options

    Seller Financing + Separate Renovation Loan
    Pros:
    Low Down Payment & Interest Rate: This could significantly reduce your initial cash outlay and make monthly payments more manageable.
    Cons:
    Financing Rehab: You might consider a personal loan or a home equity line of credit (HELOC), though these often come with higher interest rates. Alternatively, look into renovation-specific loans like the Fannie Mae HomeStyle Renovation or FHA 203K loans as standalone products for rehab costs.

    FHA 203K Loan
    Pros:
    Low Down Payment & Bundled Costs: This loan simplifies the process by combining the purchase and rehab costs into one mortgage.
    Cons:
    Interest Rate & Refinance Requirement: Higher interest rates and the need for refinancing could reduce your overall return on investment.

    Fannie Mae HomeStyle Renovation Loan
    Pros:
    Bundled Costs: Like the FHA 203K, this loan combines purchase and renovation costs, simplifying the process.
    Cons:
    Interest Rate & Refinance Requirement: Similar to the FHA 203K loan, the need for refinancing to extract equity and convert to an investment property might add to your costs.

    I am a loan officer so I have some expertise in this area. Let me know if you have any other questions, and please feel free to reach out to me directly. If you'd like to set up a call to discuss your options just let me know!

    [email protected]719-641-5169
    Ty Coutts - Aslan Home Lending 544 Reviews
    WebsiteView Page
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  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    2y

    For a full gut rehab, 203k and Homestyle/Choice Renovation are out of the picture if you're wanting to do the work yourself. Those products require licensed contractors for the rehab. 

    Leaving the property empty will not make a difference for a primary residence mortgage. You have to intend to occupy the property as your primary residence. You can convert it to a rental/investment later down the road after you've lived in it, but the intended use when you obtain the loan must be your primary place to live. Leaving it vacant for a year won't change anything and could likely even provide evidence of intent to commit mortgage fraud if you're prosecuted. It's unlikely to happen, but a very possible outcome. 

    That being said, Conventional renovation loans can be used for investment properties. Also, the opportunity cost of leaving the property vacant for a year while paying a mortgage on it and not receiving rental income is much higher than what the marginal difference in rate will cost you until you cashout refi it. If youre really worried about the rate differential, just buy it down to match what the rate would be for a primary residence product when you put permanent financing in place and mentally account for it as a Stay Out of Jail fee. 

    If seller financing is an option, you may be able to get hard money for the rehab, then cashout refi into a DSCR or Conventional investment loan when complete and take it straight to market as a rental. Just get a firm exit strategy in place (and a backup) for financing before you take action - most cashout refi products have seasoning requirements these days.

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  • Mike Klarman
    Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes
    2y

    So here is what you can expect with this deal:

    1) You won't want to let any lenders know that this is your relative.  Needs to be an arms length transaction.

    2) Let's check the deal numbers to first make sure this is a good deal. Your exit ARV is 530k. Let's take 72.5% of that number = 384,250. This is what you want your max project cost to be. You have a 290k purchase and a 80k rehab. That's 370k which is a 69% ARV project cost which is good. So it passes.

    3) What would financing look like for this deal, with good credit you could get 85%/100% let's say.  It could be 80%, not sure of your exp or credit.  15% of 290k = 43,500 plus closing costs round that up to 50k, then you'll hold it during the rehab period let's say 5 months?  So add another 10k in holding costs and then add 5k misc costs like utilities, insurance and other things.  So it looks like an investor would need to be about 70k liquid to see this deal out through the end.  And if 80% leverage not 85% then add another 10k. so 80k.  

    But the deal itself is good, just you do not have the capital to take it to the finish line.

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