Making The First Deal A Winner With Creative Financing? How do you Exit?

Question

Hello everyone,

I have a property ready to get under contract. We're still negotiating, so this is a "worst case scenario (at the price now)" situation. Asking for thoughts and opinions. This will be my first home which requires actual rehab work. Currently I have 1 rental which we have on an O.O loan, lived there, carpet and paint rehabbed, and now rent out.

Situation:

Purchase Price: Home: $59,900 (land is worth $33,000 and is next to mine)

Plan A: Rental. This home is located directly behind my house, actually touching property lines. (I would love to keep this to add equity to my current home.)

Quote for Rental Rehab: $15,000

ARV: $90,000

Rent: $900-950/mo.

Plan B: Flip. I could use the quick cash to advance my investment career.

Quote for Flip Rehab: $30,000

ARV: $110,000

I've run through several calculations on the returns and profits. This is why I am posting this now. The reason why is because of financing. Creative financing would be the purchasing angle of this home. My hard money lender can do 3 options for me:

For all 3 options: Will finance 100% if below market value. (more or less 80% LTV) Will finance rehab costs for me. Possible to delay payments during rehab.

option 1: 15%, 5 points, Amortize after 5 years

options 2: Same 15/5. Interest only or amortize. Ballon due in two years. After 2 years, can extend additional 2 years by paying 5 points out of pocket. This can be done for up to 10 years.

option 3: 10 year term at 17%. Amortized or interest only. Ballon due in 10 years.

Other options include: Getting a HELOC to help with costs. (@80%- $10,000 available. @90%- $26,000 available; we would be able to qualify for 90% at our local bank at a 4.0x rate if by the end of the year)

Loans? What loan types are offered that non-owner occupied investment properties qualify for?

Thank you for any advice, wisdom, knowledge. It will be much appreciated.

Jared

Jared Emerick · Answer

@Brandon Turner Again these are worst case numbers (where they're at now). We're meeting at the property next week.

In reply. Exactly my thoughts right now. Cash flow as a rental is thin with the hard money rates for sure. Plan there was to refinance the property to lower rates and lower monthly payments (at 80%, or$72,000, refinance would just be under money owed to Hard money lender). It would work better with that scenario (over time nicely) through the calculators (. I guess it just concerns me to count on refinancing as a necessity to cash flow properly and maintain equity in case of unexpected drop.

With the flip, The numbers are too thin for me where they're at. The money is expensive, and to get it done with <80%LTV (the numbers are right at 80% now)... i have to assume it 1. sells for 110,000 2. It sells fast. Two things I don't want to have to count on when flipping.

It seems at these numbers, although possible, the deal is making money at the sale. Not the buy. And I just don't like that. If the purchase number can be around $30-35,000 (my ideal entry point). Then the deal makes sense.

Thanks for your thoughts @Brandon Turner  @Jeff Rabinowitz @Larry T.

Larry Turowski · Answer

@Jeff Rabinowitz This is where comps are an art.  Plus we are likely talking bank appraisal for a buy-and-hold, which for me come in about 8% low, vs actual sale price if the house is put in showcase condition. It does sound reasonable that an additional $15K of rehab would put add $20K of value.

@Jared Emerick Okay, I guess I misread that.  In that case there is not enough meat on the bone for a flip.  $60K, $30K of rehab, closing costs on both sides, likely realtor commission on the sale side, holding costs, not to mention hard money costs.  And I wouldn't even consider a good rental if you have to use hard money and refinance.  Maybe if you had the cash, and it would rent for $1,100/mo or more. and you could refi out after rehab 70% of ARV, $63K or more.  You'd still likely have about $17K into the property.

Brandon Turner · Answer

Hey @Jared Emerick - I'm not convinced this is going to work out great either way but I don't know every detail either. But here's my thinking :1.) I don't see a ton of cash flow as a rental, especially paying that high interest. I mean, you might make a little bit, but in the end, over time, I'd bet you'd break even. Now, this might not be bad if it's in an area that is quickly appreciating, but if not, I'm not sure it's worth the hassle.

2.) The flip option does seem thin, especially since it would be your first big flip like this. I would probably double that budget and see if it still made sense.

In my experience, "convenient" properties tend to not be the best deal. I once bought a house 2 doors down because it was convenient and cheap. It was a bad idea. I let the convenience of it cloud my judgement on how much work it really needed.

Not sure if that helps a whole lot. And again, I didn't run all the numbers through the rental property calculator or flip calculator, but those are some of my concerns!

Thoughts?

Jeff Rabinowitz · Answer

How are you getting two different values for the home depending on whether you are using it as a rental or are selling it?  The ARV should be determined from the recent sales comps.  Unless you are forcing value in your flip rehab plan by, for example, adding a bedroom, adding a garage or refinishing the basement, it seems unlikely that the house with the "flip" rehab will be worth $20K more than the house with the "rental" rehab.  Of course, there is always variation in estimating ARV but intended use is not usually a factor.

Jared Emerick · Answer

UPDATE TO ORIGINAL: I also wanted to add that a JV option has opened up with a friend/mentor who runs a blind pool fund and the investor selling said "If needed" he could carry back a small 2nd lien position for the HML to agree to 100% finance for me.

Jared Emerick · Answer

@Larry T. Thanks for the thoughts. The numbers we're correct. I was just stating that the land was worth $33,000 alone. Therefore, leaving the house valued at $26,900. The purchase price is $59,900. Since the home is right behind me, I know the values a little better. With a clean up the house could probably get the $60,000 as a retail rehab (203k loan or a similar loan for owner occupied). I was thinking though from the investor-to-investor purchase that number ($59,000) was too high to make this work, but wanted to see the thoughts of others if they could make it work creatively. Thank you again for the response Larry.

Jared

Larry Turowski · Answer

@Jared Emerick I'm guessing you flipped the numbers, that the purchase price is $33K and it is worth $59,900 in current condition (you think).

If you have your numbers right this is a good flip.  It is probably too expensive to be the best rental, and especially if you have to use hard money at very high rates, which you'd want to refi at some point and have to pay another set of closing costs.

Making The First Deal A Winner With Creative Financing? How do you Exit?

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