How should I get $12,000 for rental property repairs?

Question

My wife and I want to buy our 1st rental property.  We are currently looking into a duplex that we could buy for $40,000.  We can get a 6.5% for 15 years ($314/mo for P+I) or a 7% for 30 years ($240/mo).

My wife and I have good salary history and good credit (780 and 810).  After 10% down + closing costs we would need to put $6,000 down (10% of purchase price + $2,000 closing costs).  We can and are willing to pay the $6,000.

The duplex will rent $525 per unit ($1,050/mo) after repairs are made.  Repairs are estimated to be $12,000.  We do not want to use any of our other current assets (401K, IRAs, etc.).  Our plan is to rent the property for many years to come.

We have $65,000 equity in our primary residence (which has a 30 yr fixed for 5.875%... if it matters).

What would be the best way to come up with the $12,000 for repairs?  HELOC?  2nd Mortgage?  Other?

N/A N/A · Answer

How does the 100% cashout work?  Thanks.

N/A N/A · Answer

100% NOO cashout allows you to access all the equity in your property. Rates are higher for this option so I would only do it if you had a plan of action for the monies. Otherwise you could just leave it free and clear through your HELOC on your primary.

Best Regards,

N/A N/A · Answer

Annual income.  Gotchya.  Thanks!

I will call my appraiser ans ask about the 'income appraisal'.  Again, thank you!

N/A N/A · Answer

Maybe you could take out a HELOC on your primary. You need about 52k total right? 40k purchase+12k rehab. If that is correct you could achieve these results with a HELOC. Then you could keep you 10% down and the closing cost. You would also have additional monies from your HELOC. You could then do a 100% cashout once property is rehabbed to pay off the HELOC if you like or use that for purchasing additional properties. I have a few no seasoning products on NOO cashout financing. Feel free to call or email me directly with additional questions.

Best Regards,

Ryan Webber · Answer

Gross Rent Multiplier or GRM=price/annual Gross Rental Income

GRM, unless otherwise stated, is based on annual income.

$1050 per month income X 12 months = $12,600 annual Gross Rental Income

GRM=$40,000/$12,600=3.2

If $52,000 is the contract price

GRM=$52,000/$12,600=4.1 (sorry not 4.2)

GRM is based on your local market and is determined by comps (comparable sales in the same area).

Again a 4.1 GRM is extremely strong and will most likely be lower than your area's comps.  I would be surprised if your area was a 5 GRM, unless of course it is a war zone.  But if its not a warzone, then I would hypothesize you can get it to hit on an income appraisal.

Ryan Webber · Answer

As long as the property will appraise for it, you can put a contract on it for $52,000 with a seller concession of $12,000 for repairs.  Now not all lenders will accept this, but you can find one that will.  You may have to document the repairs that will be done and get estimates from contractors.  Now depending on you lender, sometimes you can just get a check at closing or sometimes they will set up an escrow account, and contractors will request the funds via invoice.

Again you may have to search around for a lender that will do it since it is unconventional, but they're out there.

N/A N/A · Answer

Thanks Ryan.  I would expect the property to appraise for much less than the after repair value (ARV).  Any other suggestions?

N/A N/A · Answer

Good info Ryan.  I will call an appraiser friend to find out more as to how the appraisal values are determined.

So, how exactly is GRM (Gross Rent Multiplier) determined?  This is probably a topic for another forum...  I'm new to REI so this is something I have not yet come across.

I see on one website that it is determined as:

GRM (38) = Sales Price (40,000) / GRI or Gross Rental Income ($1,050)

My figure 38 is different than 4.2.  Sorry to be dim, but could you explain this for me and others that may be following this thread?   8)

Ryan Webber · Answer

Are you sure that it won't appraise, because going off of an income appraisal $1050 in monthly rents for a $52,000 property is a gross rent multiplier of 4.2.  Now it depends on your market but a GRM of 4.2 is very low for any market.  Even good rental markets will pull atleast a 5 if not a 5.5 for GRM on income appraisal comps.  A 5 GRM would be $63,000.

Also, I'm not sure what you mean by it will most likely appraise for less than the ARV.  Why?  Do you mean in its current condition?  An appraisal can be calculated "as if" repairs/updates were completed, and if you have contractors estimates for the repairs then they can factor that directly into the appraisal.