Do you borrow money to do a rehab project?

4 Replies

I'd like to get a rough idea if most people use cash to cover rehab expenses, or if they take out a loan/credit card/2nd mortgage/etc.?

Just another non-scientific poll from me :whistle:

I hereby promise to us CASH, ALL CASH, and nothing but THE CASH, to purchase, rehab and any other thing. Why take on an added expense?

frank

Frank - Guess that's what the name stood for - ALL CASH? lol. I guess you weren't kidding when you picked that one. I agree with you on using cash when you can, but I do think you must use leverage to build your portfolio.

My recommendation for your next one--if you don't use cash to purchase it--is to ask around for a construction loan from a local bank. It will allow you to include purchase costs and rehab costs, as well as your closing costs...that is, if the purchase price + rehab + closing costs come to less than 80% of the future appraised value of the property. 80% is the usual amount you'll get from a local lender. I have also found that local banks, not mortage brokers, will give better deals on the costs of the loan and other fees.

I've been lucky enough to locate a local bank that will give construction loans based on an appraiser of my own choice. And, I choose to use a generous appraiser! :D

But, if you already own this property, I'd suggest just using cash for the rehab. If you only have SOME of the funds, but not enough to cover the full rehab, arrange for a refi of the property to occur right as the property is nearing completion. Then, pay the balance you owe your contractors from the funds you received from the refi.

Originally posted by "Pam Hudson":
I'd like to get a rough idea if most people use cash to cover rehab expenses, or if they take out a loan/credit card/2nd mortgage/etc.?

Just another non-scientific poll from me :whistle:

For those that are just starting off or working on larger rehabs paying cash for the complete project may not be an option.

Most local banks (at least in this market) will not do 100% financing unless a track record has been established. In addition, banks, along with conventional mortgage lenders may have debt to income ratios that many investors can not meet.

I recommend that investors who have scenarios such as above consider using a hard money lender. They usually can fund up to 100% of the purchase + fix if within 65-70% of the after repaired value. The loans are short term with no prepays. LTV, ability to repay, a good exit plan, and experience are more of a factor than credit scores.

Once the project is finihsed, a no seasoning cash out refinance can be done to pull equity out, if your goal is to retain as a rental.