@Clay Manship
Have you thought about Flipping this 4 plex? It is FHA ready for under $5k, right? Two of your units are tied up on leases until the summer of 2015 (Making the down to the studs rehab difficult) and 2 are vacant. You could get one more renter in the 3rd unit on a lease for as much rent as possible, and leave one open to facilitate selling to an owner occupant on an FHA loan. (Maybe one of your friends that are currently looking). I don't know your market but based on your $240k valuation after major rehab I'm betting this would appraise for at least $150k and probably more AS-IS, FHA ready. (Maybe even the $170k to $180k range)! You have the $85k purchase price plus the $5k to make it FHA ready bringing the total to $90k. Add holding costs and a real estate commission and it might put you in the $105k to $110k range as total costs against your sell price. If you could sell it between $150k and $180k you could pocket $45k to $70k!
If you go through with the rehab, you will actually have a lot less equity. If you decided to sell, say after a year, and used an agent to list the property at 6% it would cost you $14,400 if you sold at $240k. This leaves you with $225,600 minus everything you have into the property including holding costs and transaction fees. (You mentioned a total of $200k in purchase plus renovation). Hopefully you wouldn't have to give up closing costs to get it sold (3% or more dropping to $217,400). As you can see the equity position is much smaller in this scenario! Even if you just refi and hold onto it the equity will be less than pre-rehab, especially as a percentage of total value.
Another option is to refinance as-is asap. (There may be a 6 month hold on a cash out refinance). Say you can get that $150k to $180k appraisal, basically as-is. An 80% traditional loan will yield $120k to $144k minus origination fees and loan payoffs. You can then put $25K to $50k in your pocket tax free, until you sell, and forget about the mortgage insurance. In this scenario you don't have to live in it at all if you don't want to and you are free to go out and find another one while this one puts cash in your pocket up front and on a monthly basis! Fully rented for at least $2,400 per month with upside to your rents, this should put at least $1,000 a month in your pocket after expenses while paying down your mortgage! (Not accounting for vacancies and repairs, etc.) Skip the major upgrades in this scenario and consider paint and carpet when needed and be happy to let the nicer properties around yours help bring up your property value.
Just thought I would throw out some other scenarios as the thought of putting a $115k+ rehab into a viable $85k purchased, almost FHA ready property, is extremely hard to wrap my mind around.
