Rehab with HELOC vs Hard money

[Octavio Dondiz]

Hi BP community,

 I'm in the process of buying my first rental property and would appreciate some guidance on how you would approach the financing considering my current resources.

Context: my plan is to BRRR the property and keep it as a long-term rental. I currently have ~$200K liquid cash reserves and an unused HELOC with a $350K credit limit (it's actually an SBLOC but pretty much same thing).

Assumptions for the deal based on what I'm seeing in the market: 

- $180K purchase price

- $60K rehab (includes 15% cash for contingencies)

- 3-month rehab 

- $260K ARV

I'm torn on how much money I should borrow -if any at all- during the purchase + rehab phase given I technically have enough cash &not considering conventional despite my 800 credit score wouldn't be possible given minimum seasoning period is 6 to 12 months based on my research) to cover those expenses myself.

What approach would you take?

A) fund myself: Buy with cash, rehab with HELOC, refinance with DSCR loan

B) partial funding: Buy with hard money, rehab with HELOC, refinance with DSCR loan

C) outsource funding: Buy+Rehab with hard money, then refinance 

Pros of borrowing: I would have more cash reserves for emergencies. Cons: I would have to pay interests on the hard money loan (at ~10 interest rate).

I chatted with 3 lenders (brokers), and they suggested using the path C (I.e. not using my own funds and going through the hard-money route instead) claiming that would help me get more money out of the deal through the DSCR cash-out refinance. They claimed with path C I'm more likely to secure 80% back in the cash out refinance (keeping only 20% down whereas path A and B would likely lead to me getting 70 or 75% back in the cash-out refinance. They claimed that lenders are less likely to let you keep only 20% down if you paid for the whole thing in cash. Is this accurate? What path would you choose with all the above considerations/assumptions?

Thanks!

[Erik Estrada]

Quote from @Octavio Dondiz:

Hi BP community,

 I'm in the process of buying my first rental property and would appreciate some guidance on how you would approach the financing considering my current resources.

Context: my plan is to BRRR the property and keep it as a long-term rental. I currently have ~$200K liquid cash reserves and an unused HELOC with a $350K credit limit (it's actually an SBLOC but pretty much same thing).

Assumptions for the deal based on what I'm seeing in the market: 

- $180K purchase price

- $60K rehab (includes 15% cash for contingencies)

- 3-month rehab 

- $260K ARV

I'm torn on how much money I should borrow -if any at all- during the purchase + rehab phase given I technically have enough cash ¬ considering conventional despite my 800 credit score wouldn't be possible given minimum seasoning period is 6 to 12 months based on my research) to cover those expenses myself.

What approach would you take?

A) fund myself: Buy with cash, rehab with HELOC, refinance with DSCR loan

B) partial funding: Buy with hard money, rehab with HELOC, refinance with DSCR loan

C) outsource funding: Buy+Rehab with hard money, then refinance 

Pros of borrowing: I would have more cash reserves for emergencies. Cons: I would have to pay interests on the hard money loan (at ~10 interest rate).

I chatted with 3 lenders (brokers), and they suggested using the path C (I.e. not using my own funds and going through the hard-money route instead) claiming that would help me get more money out of the deal through the DSCR cash-out refinance. They claimed with path C I'm more likely to secure 80% back in the cash out refinance (keeping only 20% down whereas path A and B would likely lead to me getting 70 or 75% back in the cash-out refinance. They claimed that lenders are less likely to let you keep only 20% down if you paid for the whole thing in cash. Is this accurate? What path would you choose with all the above considerations/assumptions?

Thanks!

B) partial funding: Buy with hard money, rehab with HELOC, refinance with DSCR loan

Sounds like the most appropriate option here. While you will save more money using your own cash + HELOC, you may also need more cash for holding costs and in case your rehab scope of work is higher than anticipated. The last thing you'd want is to end up running out of money and with a lopsided deal that is not able to be financed on a long term loan.. 

I think a lot of investors underestimate the amount of cash needed to execute a flip/BRRRR.. Unless this is your 10th exit, doing a combination will really help preserve liquidity and anticipate longer rehabs/higher costs