Posted 7 days ago

Ways to Pay for a Fixer Upper

So you’re on the hunt for a fixer upper. Maybe you have just not found a house that meets everything on your checklist, or maybe you are wanting to do a live-in flip (forced equity and sell down the road for a profit). Whatever the case may be you are probably wondering how you can pay for a fixer upper. Here is a few of the ways you can pay for your next renovation project. Keep in mind, I’m not a CPA, mortgage broker or attorney. (Just an investor that has done a mix of these strategies) You’ll want to discuss these strategies with all appropriate professionals to make sure everything is done legally, and you know your tax liabilities.

In this post, we will use the example of a $50,000 purchase price and a $50,000 renovation budget, but you can manipulate the numbers to whatever fits your fixer upper’s budget.

Conventional Loan

Does the house you are looking at have:

  • Heat source
  • Water source
  • Working electric

If the house you are looking for can check off these three items, you are in luck. Banks consider the house “livable,” and will likely lend on the purchase price.

We can really get into the weeds on how to do this with low and no money down but let’s stick to the basics for now.

The bank will require a 20% down payment on the $50,000 purchase price.

$50,000 x.20= $10,000 down payment

So now that the bank has covered $40,000 of the investment you have to come up with an additional $60,000, and that’s not just chump change. So what now?

The Slow Remodel

In this example, once you move in the house- it is livable, just not pretty. You could slowly save up money while you are living in the house. Fixing up one thing at a time with the cash that you save. This is a slow, but debt free model.

If your fixer upper is not considered “livable,” you are going to have to complete some capital-intensive repairs before you move in. Which means more upfront costs, so you will want to make sure you have a plan in place.

Home Equity Line of Credit

Do you have equity in other properties? If so, you can open a HELOC to do the rehab on your fixer upper. Typically (all banks have different terms) the bank will lend up to 80% of the value of your existing property.

If you have an existing property worth $100,000 and you have a mortgage on the property of $20,000, you will have $80,000 of equity. Not so fast though, the bank will only lend up to 80% of the value.

$100,000 x.80= $80,000 max lending-$20,000 mortgage= $60,000 HELOC

BAM! There is your extra $60,000 complete the renovation on your fixer upper.

Other People’s Money (OPM)

This is when the metaphorical “rich uncle,” could really come in to play. They could just loan you the cash and tell you to pay it back on a promissory note. You guys can come up with terms on the amortization schedule, payments, interest rates and points.

If you do not know someone that has the cash to lend for a ROI, possibly you have someone with equity. Say they have a LOC that lends at a 4% interest, they could loan you the money at a 10% interest, making a 6% return on equity.

You will want to talk to an attorney, CPA and the bank when utilizing this strategy… or really any strategy.

Rehab Loans

With all the hype over HGTV shows like “Fixer Upper,” these large-scale renovations are becoming more popular. Banks are starting to lend to buyers on the purchase price AND the renovation. These loans typically work based off the after-rehab value (ARV) of the property, or the purchase price plus the renovation costs. These loans typically have a higher interest rate, like a construction loan until the renovation is completed.

The Refinance

Have you found a strategy to help you buy your next fixer upper? If so, you may be thinking how you are going to pay yourself back or the individuals that lent you the money for your rehab. (Unless you are trying to go debt free and use all your own cash). To avoid going down a rabbit hole on the refinance, I will keep it short and to the point. You can refinance the property based off the new value to pay back your lenders, or yourself. If you plan to refinance, you will want to talk to the institution doing the refinance about the seasoning period, LTV they will lend at and everything in between.

Why a Fixer Upper?
It is pretty simple. If you buy right and do your renovation right, you are going to have forced equity and a product you love. It is not an easy task, or a risk free one, but it can be well worth it.