How to get financing for a rehab?

Question

I just bought an REO for a local bank with borrowed cash from an investor. Now I need to get money from another source to gut and rehab this property from top to bottom.  I'm looking for advice of a few methods that I could apply.  Would I be able to go to a bank and ask to refinance the house to pull the equity out of the home, then pay back my investor with that cash and also rehab the property?  allowing me to get it ready to sell on the market, and once sold pay the bank loan back?  This is my first property, please help. I am learning as I go.

Michael Ealy · Answer

I like your style Jeremy. "Learning as I go." That's my learning style too and that's how I acquired over 1,000 units. I don't listen to 315 podcasts before taking action. I listen to one and apply it immediately.

Anyway...

The answer to your question is: find & talk to a reputable hard money lender in your area. With an HML, you can borrow money you need to pay off your investor and have some money to rehab the property as well (assuming of course you got the property with tons of equity the day you purchased it).

HMLs typically lend up to 70% of the After repair value of the property. SO if the ARV of the house is $200K, you can borrow up to $140,000. If you purchased the house for $100K and it needs $30,000 renovation, you have more than enough equity in there to pay off the $100K you used to buy the house and will still have the cash you need to renovate it.

I suggest IF the house has enough equity - like in my example above - that you borrow MORE than the cost of acquisition and repairs. Why? You need to have enough cash to pay for the cost of money (meaning the interest payments required by the HML - these guys charge 12% or more and they also charge points upfront 1-5 points!) and other holding costs (like cost of insuring the house, cost of water/electric/gas, etc).

By doing it this way, NONE of the money comes from your pocket. That's my favorite way of real estate investing.

Jeremy Roach · Answer

Thank you!!  I figured it was time to pull the trigger and get into the game.  I am currently in the process of finding out what the property with worth.  I bought it for $15k and my county research is saying its asset at $60,000.  I'm not 100% sure that correct, but like I said I'm in the process of learning asIi go. (lots to learn)

Tomorrow I will find a HML in my area that would be willing to work with me.  Thanks again for your mentoring! I'm really excited that the journey an REI has now begun and where it will take me.