All Forum Posts by: Perry Farella

Matthew- There is a new VA Renovation loan you can use to get the cash needed added onto your regular VA loan with no down payment. Not sure if most lenders will allow them yet a multi unit properties but if it can be configured as a single family with maybe a nanny suite that doesn't have a full kitchen the VA renovation loan should work. I have written about it last year in my blog link below.

There are lenders doing Jumbo rehab loans for tis situation but most will want 20% down to a loan size of 1.5M or 25% down to a loan size of 2M.

I like the duplex only because its hard to believe a 100 year old house can be rehabbed for only 35k. Check the local city Planning Dept. to learn what code upgrades will be required when applying for building permits. You may be surprised to learn they want a new water line that's not an old Lead pipe from under the street, hard wired smoke/co2 detectors, all new wiring to current codes and perhaps new plumbing, new HVAC. Usually if you are adding water service points like a dishwasher or extra bath or laundry the city will want a larger 1.5 inch water line to feed all that ne water demand versus whats lilely an old lead .75 inch pipe there now. That alone can cost 10k to dig up the street and install or more.

The worst mistake you can make in investing is to under estimate rehab and monthly carrying costs and time it takes to rehab.

Just to add to the conversation as a Chicago resident. First Rent Control:  Met with a lobbyist for the Illinois Association of Realtors this month. Rent Control has to be voted in by the State Legislature to void the 1997 statute prohibiting it in IL before Chicago could pass it. I'm told no Republicans support Rent Control and no down state Democrats support it. It is not expected to even make it out of Committee let alone get to a Floor vote. It is only a handful of Northside Democrats pushing Rent Control because they think "rents are out of control". Alternatively there are bills on how to provide affordable housing that have a better chance of passing. I realize the new governor ran on supporting rent control but that doesn't mean it is a priority over other pressing problems for him. I'm not worried about Rent Control. The market should dictate rents and it does that well.

In terms of where to invest yes the above mentioned neighborhoods are hot. Had a client buy a brick 2 flat in McKinley Park in December for 230,000 to rehab it into a single family on a rehab budget of 205,000. ARV was project to be 485,000 so not a bad deal. We didn't project rent since its their house to live in.

I do see Englewood becoming more active with rehabbed homes appraising between 100k and 130K + in the last 6 months. These are houses that can be bought for 20k to 30k in some case and then rehabbed for about 80k into new homes basically. I see police officers and young professionals buying and rehabbing in certain areas there.

Have a client buying a true 4 unit brick in West Garfield park now for $86,000 with a major gut rehab planned with a budget of $370,000 to make the units 3 bedrooms and 2 baths with in unit laundry, new HVAC and basically new everything. Waiting to se what ARV comes back as. rents are expected to be at least 1200 a month for those units there. Owner will live in one unit and rent 3 others and should live there nearly free with tenants paying the 30 year term rehab mortgage done as a 203k.

Have an investor who bought 2 small brick houses in Auburn Gresham for 50K and 80K respectively with rehab budgets between 40K and 80k for each. ARV was 20% higher for each.

What all these neighborhoods seem to have in common is there is a local elevated train line for great transportation in walking distance same as some northside neighborhoods mentioned above. I would always buy within 3 blocks of a train station any where in Chicago to get the best rent and ARV.

What happens out in the neighborhoods is not affected by new luxury high rise apartments coming online near the lake or downtown, its a different market. Those rents are very high for even a studio at $2000 a month near the lake. That is why the northside legislators are clamoring for rent control. But rent control would only drive DOWN the supply of rentals because owners will convert them to condos and sell them off to cash out or convert even to coops to sell off. There was a great story in Crain Chicago Business last week defining all the bad effects of rent control and not even advocates for affordable housing were for it. Another bad effect is owners would not have the cash flow to properly maintain the properties so overall housing quality would go down and with it values, hurting everyone, even tenants in rent controlled units who would live in squalor for lack or repairs would be unhappy, think some areas in New York city.

So always run your numbers when looking for a rehab property and you will be fine if realistic about costs, future rents. No one can do much about property  taxes because they were kept artificially low for too many years in the city when compared with nearby suburbs. That era has to end to clean up the city finances and also at the state level in Illinois. An era of Integrity is emerging in finances and politics, watch the news. Daylight is shining into the smoky back rooms and truth is coming out. Yes taxes will go up but Chicago still has a great economy versus any other Midwest city. Young professionals flock here after school which is why rents are so high in hot areas. I remain confident if you can find the right deal and the right numbers there is much here to look forward to.

HomeStyle can close in 30 days if the buyer/borrower is swift in selecting a contractor to do the work and contractor remits their paperwork timely so an Appraisal can be ordered. I usually say 30 to 45 days is typical.

Kyle,

First I would be sure the house is still worth the 190k value you saw last year. In certain markets its possible to lose value in months if sales volume dropped as it has due to low inventory for sale in many markets. So you may not really be at 190k still unless you check again, both with and without the new kitchen.

I see a lot of people over leverage themselves in their excitement to invest and do BRRRR but later end up disappointed and possibly broke.

If you have a 15 year loan now, at I'm guessing a lower rate than is available today, and only owe 70k then you are on a fast path to pay it off and own that house FREE of debt. I cant tell you how many people would love that position. You write how Tempting it is to do cash out refi or HELOC and I agree it is but that doesn't make it the best move for you and your family. I would add extra cash each month now to get that current loan paid off in 3 or 4 years. Then that leaves you more money for investment later each month.

As I always say why encumber your current residence , especially you on a fast path to have ZERO debt on it ?  Go ahead and pay your own cash for the kitchen rehab you want and enjoy it everyday whether it adds value today or not. It will one day when you sell it.

Bottom line is when you can still buy an investment house to rehab and flip and repeat using someone else's money on a 30 year term @ 6% and only a 15% down payment I don't see how you can lose if the deal makes sense. Why ?  Because you protect your current home and family and stay on a fast path to own that house FREE of debt plus you get to buy an investment house IF you have a15% down payment and some reserves. IF you do not then save until you do.

What I write about is perhaps a less known approach where everyone has been used to just doing a cash out refi or adding a HELOC to their personal residence for quick cash and taking their chances to be successful while adding more debt to their personal residence that should be protected and not gambled on. This is a new alternative that makes good sense. The wealthiest people in this country will always tell you use other peoples money and conserve and protect your own. That includes protecting your personal home and using other peoples money on the investment home and not eating into your equity which you will use in the future when your family grows out of the current house.

Perhaps another option here is to avoid the Hard Money lender in the first place. Their rates can be from 8% to 15% around the country. I work with small investors doing fix/flips with a conventional loan called HomeStyle. 15% down payment based on sum of purchase price plus rehab dollars needed but all based on final ARV of the property - after renovated value. Plus its fixed for 30 years at say 6%, no pre payment penalty if you do decide to sell right away; plus future after renovated rent is projected by an Appraiser and lender will give you 75% of that rent number to use as assumed extra income to make the future mortgage payments. I have written about here on my Blog at BP and at my log link below.

Not sure but anytime I hear " 6 months with no interest"  I like it ! Seems like your bank is upping the end rates for the final mortgages to make up for the 6 months of no interest on the 40 K rehab  loans for each house ? The fees are also where they make a bit of money.

Just add that a 203K Standard loan will allow you to add in the full 203k mortgage payment ( including property tax and insurance escrow) for the months the HUD consultant has written the property cannot be lived in, up to 6 months worth. Meaning that you add up to 6 months worth of mortgage payments into the rehab portion of the loan and then the bank makes those payments for you so that you can afford to continue to pay your current monthly housing costs elsewhere. Just an option but helpful.

You might just figure costs on a square foot basis, like $90 a square foot for a major reno. We do that here in Chicago. Watch out for unexpected items the city may insist on to get building permits. Like a new non-lead water pipe from the street into the house, especially when they see you adding extra water service points like a dishwasher, laundry, extra bath that are not there today which may need a large diameter copper water pipe, which can be very expensive to dig up the street etc. I always tell people to go to the city Zoning or Planning dept. to ask specifically what will be required for a given house in terms of securing building Permits. You may find extra expenses to budget for. Your 203k construction consultant should also have valuable experience in this area. You can even have the 203k consultant prepare a Scope of Repairs document prior to making an offer. My Blog has many stories of how 203k works if that's helpful to you.