Buy, Rehab, Refinance & Hold

Rehabbing & House Flipping
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Buy, Rehab, Refinance & Hold

Michael Wentzel
Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes

So I'm still relatively new to the game and I'm just finishing my first rehab. My "new" strategy is to purchase run-down properties, rehab them, refinance my rehab costs back out (and hopefully my down payment) and then add the cash-flowing property to my portfolio. I'm sure I'm not the first one to try this, but I haven't come across many others doing it.

Back in January I bought a house and cottage for $32,000. I put $8,000 down and my regional bank gave me a 15-year portfolio loan for $24,000. I bought this without walking through it, which was probably my first and last time doing that. I estimated my rehab costs at $18,000, but I'm going to be closer to $23,000 when I'm done. The appraisal came back at $65,000. My bank is now loaning me 75% of that $65,000 ($48,750) on a 20-year portfolio loan at 5%.

I basically get all my rehab cash back and paid about $7000 out of pocket for two renovated houses sitting on the same property. The gross rents should be about $1150 per month and my cash flow after all expenses should be $280.

Pros-

-I would guess my maintenance costs will be lower over the next 5 years due to the rehab.

-I paid about 10% as a down payment on an investment property instead of 20% or 25%.

-I learned a lot about rehab costs and contractors.

Cons-

-It took of ton of time, work and stress.

-My loan is only fixed at 5% for five years.

My hope is that I can get my rehab costs and ARV numbers down so that I could do more deals like this and actually recoup all of my down payment and rehab costs.

Any advice or insight from those who are more experienced than me?

Mike

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Clay Manship
Indianapolis, IN · Member since 2013 · 549 posts · 310 votes
12y

My partner and I do something similar. Here is kind of how we work:

We have a private lender (individual) who lends us ALL of the purchase price and the renovation costs. We purchase a house for roughly $30,000, and put $20,000 into it, for an all-in basis of $50,000. Again, the private lender gives us this money up front through a Private Note.

After the renovations have been made, and we have been in possession of the home for one year (seasoning period) we take the private note to a local bank and refinance out at 80% LTV. So, as an example, if an appraisal comes back at $72,000, we then have a maximum loan amount of $57,600 we can use against the property. We don't take cash out, but do take the $50,000 needed to pay off the private lender.

Now instead of paying 10% on our money like we do for the private Lender, we are paying 5% to a bank and we hold on for cash flow, then go chase another deal. Has seemed to work very well in the Midwest markets.

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  • Rafael Floresta
    Investor · Philadelphia, PA · Member since 2013 · 348 posts · 111 votes
    12y

    I am on the exactly same boat, but I am still on the end of my rehab. I am not sure how you are sourcing your deals, but I certainly learned to not tell wholesalers I am rehabbing and holding. From now on I tell them I am flipping.

    0Reply
  • Clay Manship
    Indianapolis, IN · Member since 2013 · 549 posts · 310 votes
    12y

    My partner and I do something similar. Here is kind of how we work:

    We have a private lender (individual) who lends us ALL of the purchase price and the renovation costs. We purchase a house for roughly $30,000, and put $20,000 into it, for an all-in basis of $50,000. Again, the private lender gives us this money up front through a Private Note.

    After the renovations have been made, and we have been in possession of the home for one year (seasoning period) we take the private note to a local bank and refinance out at 80% LTV. So, as an example, if an appraisal comes back at $72,000, we then have a maximum loan amount of $57,600 we can use against the property. We don't take cash out, but do take the $50,000 needed to pay off the private lender.

    Now instead of paying 10% on our money like we do for the private Lender, we are paying 5% to a bank and we hold on for cash flow, then go chase another deal. Has seemed to work very well in the Midwest markets.

    5Reply
  • Bryan L.
    Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
    12y

    I used to do a similar strategy. You can save some money on closing costs by doing the initial purchase with a line of credit and/or credit cards.

    When I was doing this, I would often actually refi for more than I had invested in the house. Paying off the line of credit and putting the extra cash in my pocket. It was great. Until..... Be careful and don't over-leverage. Loading one up too heavily can lead to negative cash-flow.

    4Reply
  • Cal C.
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    12y

    As @Bryan L. alludes to this was a great strategy until 2007 then it became an absolute disaster for some of the people doing it. There were many investors destroyed this way. Make sure you are not overleveraged and you have access to some emergency funds.

    I would be more than willing to give up a lower rate for a longer term. Try for the longest possible term you can find. Last thing you want is to have to renew your loan when rates have gone up substantially and/or the value of the property has dropped substantially.

    1Reply
  • Account Closed
    Investor · NY · Member since 2014 · 74 posts · 49 votes
    12y

    Congrats on the first project! This is pretty much the strategy I'm looking to implement, except I'm probably going to be paying cash for a house in the $30-50k range to save on the loan costs, then do a cash out refi after reno.

    How did you find a contractor and did you design the reno yourself?

    0Reply
  • Chris Adams
    Contractor · Valparaiso , IN · Member since 2013 · 604 posts · 327 votes
    12y

    I do almost the exact same thing, expect I usually get over 100% of my cost out at refi. Ask me anything you like.

    My advice, you make the vast majority of profit @ purchase, so work hard on getting you rehab cost to be accurate.

    1Reply
  • Joe Butcher
    Dallas, TX · Member since 2013 · 311 posts · 94 votes
    12y

    I did something similar. Read about it here: http://www.biggerpockets.com/forums/223/topics/128845-my-first-deal

    0Reply
  • Michael Wentzel
    OP
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    12y

    Thanks for all of the feedback. Work and life have kept me off BP for a while.

    @Clay Manship When you refinance with a bank, are you going to a 30-year fixed? If you going to a portfolio loan, what kind of terms are you getting? I'm amortized over 20 years, 5 year until I have to payoff or refinance and only 75% loan-to-value. I'm thinking I might be able to do better on those terms. I'm saving my 10 conventional for four-plexes with higher values.

    @Bryan L. and @Cal C. I'm trying not to over-leverage. I am shooting for $100 to $150 a door cash flow with 10% for PM, 10% for vacancy and 15% for maintenance. 

    @Account Closed I am realizing now that I do need to do better on the purchase side. The first one I purchased without looking at (bad idea). The second one I purchased with a dream of making it a duplex. Building code has ruled that out now. But I think when I come out that other side of these two rehabs I'll have much better understanding when I'm looking for the next purchase.

    Thanks again to all of you for the feedback.

    Mike

    0Reply
  • Christian Bors
    Real Estate Agent · Mechanicsburg, PA · Member since 2014 · 529 posts · 217 votes
    12y

    @Michael Wentzel How long did this process take from start to finish? Also, when did the bank allow you to refi at 75% ltv? I heard most banks are 12 months but  some are willing to do 6 months.

    0Reply
  • Michael Wentzel
    OP
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    12y

    @Christian Bors The rehab took about 3 months. The refinance took about 2 months. I think I am pretty fortunate that I am working with a regional bank who agreed to refinance as soon as the rehab was done. I am not sure how common this is. I hear a lot of investors talking about letting a property sit for a year to "season".

    Mike

    0Reply
  • Nicole Grant
    Investor · Abilene, TX · Member since 2013 · 36 posts · 14 votes
    12y

    I am currently doing almost the exact same thing. My previous deals have been turn key and had them rented a week or so after closing. Things have gone smoothly with those. I bought this latest deal at 16K (through a LOC), estimating 12K in rehab costs and 3 weeks for repairs. My bank will loan me 80/20 which I'm hoping to recoup my closing cost and 20% through the appraisal. Comps show me the houses in that market are going between 50K-65K. I'm a week into the reno and so far things are going smoothly.

    Have you done any other deals like that one, @Michael Wentzel ? 

    3Reply
  • Ian Fisher
    Investor · Chicago, IL · Member since 2014 · 84 posts · 20 votes
    12y

    This is exactly what I've been doing as well. I'd love to find more opportunities to increase volume, and as a remote investor am happy to compensate someone for the work in managing it - a variety of potential structures for this. I'd bring capital (though very interested in leveraging as much and as quickly as possible) and a second set of eyes, you'd bring local knowledge, potentially lender connections, and on ground presence to get the work done. Ongoing pm could be done by you or another party. Would be happy to hear from anyone interested in pursuing this.

    0Reply
  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    12y

    @Michael Wentzel Put a nice package of pictures, documentation and information about you and your goals together.   Building relationships with a few lenders is what will get you to your goals.  Sales and more sales.  I started doing this in 2008.  You will probably max out with your portfolio lender and have to jump to another one, then another one.  That's what happened to me.

    Frank

    2Reply
  • Brett B.
    Real Estate Investor · Spring, TX · Member since 2014 · 39 posts · 13 votes
    12y

    I am new to this site and this is my first post. What I have found is that most banks will not let you "Cash Out." To quote one of my bankers " We want you to have skin in the game." So what I am finding is most banks will give you 70-80% of appraised cost or actual cost, whichever is less. 

    I am finding that I have to remain "Cashed in" to my investment for a certain percentage. Some banks will let me refinance after a few years to pull all my money back out, however, not crazy about that option either.

    1Reply
  • Christian Bors
    Real Estate Agent · Mechanicsburg, PA · Member since 2014 · 529 posts · 217 votes
    12y

    I really like this philosophy. My next property, if the offer is accepted, will basically  be this process. It needs about 30k in rehab but after it's seasoned I would want to cash out and put a 30 year mortgage on it. Rehabbing a property will build instant equity and since you updated most items of the house, I would think the maintenance costs would be Lower.

    0Reply
  • Michael Wentzel
    OP
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    12y

    @Nicole Grant I theorize that my maintenance costs should be lower over the next couple years since the place is fully updated. But we'll have to wait a few years and see if that theory is correct.

    Thanks for the feedback. Glad to know I'm not alone. 

    Mike

    0Reply
  • Eric Scott
    toronto, ON · Member since 2013 · 27 posts · 4 votes
    12y

    Nowadays, buying and selling property is becoming a great business.It is a very nice source of earning large amount of money but at the same time risk is also there. I agree with all you share such a nice information with us. One of my friends is also in same business and he is doing great in this.

    1Reply
  • Barbara G.
    Hartsdale, NY · Member since 2015 · 874 posts · 218 votes
    11y

    We are trying to do this.  We just bought a property, a duplex, for $72,000 and it will cost approx $25,000 to rehab.  We are paying cash for it.  Our plan is to Rehab it and rent the 2 sides for $900 a side and then  ask our bank to refinance it which they said they would do at 70% of the Appraised value.  We think it will be appraised at $120,000 so 70% would give us a $84,000 mortgage and the cost should be $97.000 (72,000 + 25,000) so we will only have $13,000 cash in.  Of course that is only if it gets appraised for $120,000 and only if our renovations stay at $25,000.  Lets see how it plays out. 

    2Reply
  • Michael Wentzel
    OP
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    11y

    @Barbara G.

    Good job for giving it a try. We left a good bit of cash in our first two, but it was a great learning experience we still ended up with cash-flowing properties for less than 20% down. We are various stages with properties 3, 4 and 5. Number 3, we broke even after the refinance. Number 4, we left some money in it because our appraisal was low. Number 5 looks like it will give us some cash in our pocket after the refinance. So we're learning and growing.

    Mike

    0Reply
  • Casey Rolland
    Investor · Port Townsend, WA · Member since 2014 · 103 posts · 50 votes
    11y
    Originally posted by @Franklin Romine:

    @Michael Wentzel Put a nice package of pictures, documentation and information about you and your goals together.   Building relationships with a few lenders is what will get you to your goals.  Sales and more sales.  I started doing this in 2008.  You will probably max out with your portfolio lender and have to jump to another one, then another one.  That's what happened to me.

    Frank

    Hello Frank (I know you are in CA) and Folks in the State of Washington,

    Can you please advise how I may find  "portfolio lenders" in the state of WA?  I am mostly Buy & Hold investor and I maxed out Conventional and HELOCs loans. 

    For the folks in in the state of Washington,  I would greatly appreciate some recommendation for the Portfolio Lender info.

    1Reply
  • Robert D.
    Investor · Bartlett, IL · Member since 2014 · 193 posts · 43 votes
    11y

    Buy, Rehab, Refinance & Hold = you are conduit for the bank to make money.  (if) tenants pay you pay the bank. anything goes wrong with the property or the tenancy it is your cost and sometimes you are lucky if you break even for the year. 

    here is a new strategy :

    Buy, Rehab, SELL!!

    Buy, Rehab, SELL!!

    Buy, Rehab, SELL!!

    buy rental free and clear

    Buy, Rehab, SELL!!

    Buy, Rehab, SELL!!

    Buy, Rehab, SELL!!

    buy rental free and clear

    Buy, Rehab, SELL!!

    Buy, Rehab, SELL!!

    Buy, Rehab, SELL!!

    buy rental free and clear

    end 12 rolling months with 3 rentals

    secure line of credit against your rentals (pay interest e.g. 5% only when you draw) and go after bigger projects as you have more chips to grind

    that's how you create long term wealth and freedom.

    3Reply
  • Michael Wentzel
    OP
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    11y

    @Casey Rolland

    I don't know of portfolio lenders in Washington state, but I am sure @Brandon Turner

    knows a few. If you can't find a referral, you can just start calling local banks and credit unions until you find one that is willing to work with you.

    Mike

    0Reply
  • Michael Wentzel
    OP
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    11y

    @Robert D.

    Thanks for the input. That is definitely another strategy. It would probably work in certain markets. For me it is easier to get an appraisal and a refinance than actually selling the properties. There is certainly more than one way to make money in Real Estate and create passive income.

    Mike

    1Reply
  • Dan Close
    Rental Property Investor · Louisville, KY · Member since 2012 · 51 posts · 31 votes
    10y

    Old thread but was reading it and thought I would share a story of one of my earlier rentals. First a bit of background: 

    I purchased a house in somewhat of a war zone for 13k cash. Purchased from a wholesaler who I believe picked up a few from the bank in bulk. He put in a new water heater, cleaned it up and bit, got a tenant and then listed it for sale. Good thing was I didn't have to to any work to the property. I also thought it was good that the property already had a tenant that was paying 600 per month. Buying a property with a tenant actually turned out to be a bad idea but that's a different story.  

    Held the property for about a year and then took a loan out against it to buy another property. I don't remember the LTV they allowed but could probably find an old email if anyone is interested. The bank allowed me to take out @ 40K against the property. Being able to cash out this much isn't normal in my market in today's day and age and i'm not sure how it actually happened (could do this a lot in before the recession I've heard). I wouldn't probably do this again on another property even if the banks would let me but it was a huge help when starting out.

    0Reply
  • Jake Recz
    Manville, NJ · Member since 2015 · 141 posts · 87 votes
    10y

    Hey guys! I'm sorry to revive an old thread but I see one thing missing here and I can't wrap my head around it. I can find a deal, I can rehab it and I would like to refinance it and keep it as a rental BUT... The Refinancing part. How do you do it? The banks in my area want a stable employment history for the past two years, pay stubs, tax returns and that's JUST to get a HELOC! Refinancing sounds about the same. Considering I do a lot of the rehab work myself, my employment history is kind of spotty. I was fortunate enough to be on unemployment while rehabbing the recent one. The down side is that I have a free and clear property but no bank will even give me a HELOC. So how do you do it?

    1Reply
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