Purchase investment cash then redo on property?

Question

I found an investment property!

My question is, would it be better to purchase cash then do a refi on it? (Pros-cons)

Or

Finance the whole thing on conventional having to put 25% down?

Andrew Postell · Answer

@Jordan Jaramillo you might have found your solution by now but I would highly suggest in speaking with your lender about refinancing AFTER you purchase with cash to make sure you can do that and how much you will get.  Knowing ARV is a skill set that you will have to continually get good at...over and over and over.  You will need to know it on every deal....well, I guess you don't HAVE to...but if you don't that means you might be leaving a lot of money on the table.  You might get lucky by not knowing the ARV but you might not.  Speak with your lender on the cash purchase thing though.  There are some specific rules to it that you need to know about.

Now, I'm not sure what type of investment property it is (but sorry if I missed it) but on a single family home you do have the option of putting down 20% and 15% when you purchase it.  Just in case that helps with anything.

@Matt Russell the answer to your question comes direction from the numbers you provided.  As long as you know how to do the math - the numbers will tell you your answer:

• Conventional Loan purchase - 25% down = $40,000  + $10,000 rehab + closing costs (let's estimate $10k just to have something here) - TOTAL OUT OF POCKET = $60,0000
• 
• HML Purchase - Lend 75% ARV (you didn't state this but this is pretty standard - if yours doesn't offer 75% of ARV then go find a different HML) - 75% of ARV = $172,500.  Money needed to buy and rehab - $160k purchase, $10k rehab, $10k closing costs = $180,000 - INITIAL OUT OF POCKET = $7,500.  Then you have to refinance...so refinance of 75% of ARV = $172,500...so you'll have to come out of pocket closing costs again = $10k.....TOTAL OUT OF POCKET = $17,500

I'm basing this on your numbers of course so if your numbers are off then so this will be as well....but would you rather come out of pocket $60,000 or $17,500?  Of course we know the answer.  So go that route.  Feel free to ask anything additional if you need.  Thanks!

Jordan Jaramillo · Answer

@Greg Scott

Thanks for your response.

-The purchase of I did cash would be between $170k and $180k

If I financed $183k-$189k.

-The ARV is tough because it doesn’t really need much, I was going to paint the exterior a new roof is being put on before the sale so repairs is minimal which is great and it already has tenants.

The issue is it’s in a very rough area.

-you shared you had additional options I love to hear them, I figured on investment prop I could only do conventional or cash.

Greg Scott · Answer

The optimal answer depends on many factors.

• What is the purchase price?
• How much is the rehab?
• What is the ARV?
• What loans do you qualify for?
• What is the rent / cashflow / PITI?

You only gave two options but there are much better ones if the ARV and rehab are high and you have good credit.

•

Matt Russell · Answer

@Andrew Postell Thank you for your input. I will check my numbers again but believe them to be accurate. I have been requesting funds for only the purchase price but should be looking for 75% of ARV?

Also, I just went through a conventional refinance on a different property and was only able to get 70% LTV with that lender. I didn't really shop that number because I have a good relationship with the lender.

I always greatly appreciate the BP generosity in sharing experiences and knowledge.

Dan Portka · Answer

@Matt Russell @Jordan Jaramillo

2 things i can think of:

1) I think you both need to account for the financing costs of the short term loan in your calculations. How much will the fees/points + interest be during the duration you'll have the loan. I've also spoken with a few lenders recently that say conventional refinances are taking longer at the moment so you need to consider that as well.

2) whats the opportunity cost going to be if you go all cash? you'll have $170K of funds tied up for a few months while you go through the rehab and then refinance. if another deal comes along you could lose out on it if you don't have any cash.

Matt Russell · Answer

Jordan I don't mean to hack your post but I am in the same dilemma trying to figure out which route to choose.

I have a contract on a duplex for 160k repair estimate of 10k (mainly cosmetic) ARV of 230k.

Hard money lenders quoting around 2 points, 11% for 12 months.

Traditional 25% down 4% APR.

Either option is doable but I will be looking for a way to get my cash back out through either refi or HEL.

This would be my first time diving into the hard money pool just looking for advice or the best way to go about the purchase. Thank you

Jordan Jaramillo · Answer

@Dan Portka

I know the seller and relator. So we had this conversation about the two different options and these are the numbers he gave.

Dan Portka · Answer

Looking for some more info so I can help - How do you know the price difference if financed vs all cash?

Nicholas L. · Answer

@Jordan Jaramillo I have to ask... can you elaborate on "rough area"?  What are your projected monthly expenses?

Purchase investment cash then redo on property?

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