Buy Low, Rehab, Cash-Out, L/O, Do It Again
Hello All,
Since joining this board and the world of real estate investing five months ago I acquired 3 Investment Houses. This is a really great site. I truly appreciate talking to real investors who are really out there every day doing real deals. While banging my head against the wall, my hammer against the nail (thumb), asking many really stupid questions and getting many great answers here at this site, I have come across a strategy that I think might be a winner. Please let me know what you think:
1) Buy the house with a hard money loan, Subject To, 1031(CASH) , etc.
2) Fund Repairs in hard money loan or out of pocket if purchased Subject To, 1031 (CASH), etc.
3) Cash Out Refinance at 85-90% of the repaired value. Put the difference between this and what you bought the property and did the repairs for in your pocket tax free. (House has to have at min. break even cash flow with expenses).
4) Lease Option to get a little more cash up front and cover the note + expenses.
5) Once house is sold take back-end profit, 1031 into a new CASH deal and do it again.
I am at stage 3 in this process, waiting on the call from the bank.
Please everyone, let me know what you think of this system. Weaknesses? Strengths? Any creative ideas I should consider adding to this? What should I be looking out for?
TYIA,
JohnCL
Great system, something close to what I am doing myself. I just hold them as rentals though rather than do the lease/options as I like the long term rental income. Each property produces around $150-200/month positive cash flow. Goal for this year is to do 25 properties.
I normally make about 10k cash out on the refi and do a couple a month. I then save up and do a total cash property every 4-5 properties which provides more cash flow and allows for additional collaterial if I need it for a larger deal.
Rock on
[addsig]
The problem that I come accrossed most you already outline in your note ...
"I am waiting for a call from the bank".
Therefore my whole stretegy from start to finish is to minimize the length of time to get that call from the bank.
Hello!
Yep, that's a fine idea that I had just about come up with all by my lonesome, but thanks for solidifying it in my brain pan!
Thanks,
OnTheWater
Who lender will refinance the property at the new appraised value after improvements, and how long are you holding title to the property before you refinance? Thanks
I have used both Chase and Washington Mu. for cash out investor loans. No question on time of ownership just that I do an 80% loan against the appraisal. Which is fine since I have a 45% differance between my investment and the final appraisal.
The deal is check the tax records and see what the last sale or 2 were and plan ahead prior to purchase so that you buy right then don't increase too much over the past sale, who's to say it's not worth the same as a prior sale once you rehab.
I am also doing something similar. I am buying REOs doing rehabs and refinancing my costs plus some and renting out the property. I am in the middle of the first one, but I am looking at other opportunities.
Good plan, just a few things to consider.
Work with a good mortgage broker or a small local bank so you won't have to "wait on the call from the bank." As your business and experience grows this will become easier.
Don't overload yourself with debt this way. This process works well, but I've seen many investors that crumble as soon as the times get shakey because they have overextended themselves. Always put back some of the loaned/earned income for the hard times. Take telemon's advice about getting a free and clear on occassion.
I'd also change 3 and 4. L/O first, refi 2nd. That way you know your monthly income (rent) and can better gauge your refi loan. I'd always want at least a $200/month positive cashflow, so I wouldn't borrow more than that would allow.
Roger
That was my plan many moons ago. Over the years less than 25% of land contracts/lease options have actually purchased the property . Now I either to one of two things: Buy, fix, and sell, within 90 days or Buy, Fix, and rent, and sometimes refinance
But I hope you have better luck
Lori
[addsig]
Lori,
That is just another benefit of owner financed deals like LOs and CFDs in my opinion.
A tenant or buyer in a LO/CFD will pay more down (nonrefundable), more per month and take better care of the property than a straight rental deal. At the end of the contract term, IF they choose not to buy/refinance, then the investor gets back a house that is usually in better condition and higher FMV than they sold originally.
Also, yes, some contract buyers do choose not to buy the property. BUT, it's been my experience that most don't because the investor didn't take the time to help them thru the contract term to prepare for buying/refinancing.
Personally, I have them sit down with my mortgage broker BEFORE they sign the contract, and decide IF at the end of the term, they would be able to buy. We look at their credit, and tell them what they can do to fix and rebuild it in that time frame. We've even went so far as to create a budget for the tenant/buyer so that they wouldn't overspend and put themselves in the same position as before. By contrast, 70% of our customes DO end up buying the property.
Roger
It would be helpful to everyone if you clarified what you mean when you give cashflow numbers. A cashflow of $200/month can be great or horrible depending on what the mortgage is and whether or not you are including all current expenses as well as putting aside money for long term replacement of roofs,etc. Somebody was talking about a $150/month cashflow on a $1million dollar property deal a while back which seemed to verge on insanity to me.
Rajwarrior:
Great comment about helping your L/O tenants clean up their credit. That is a fresh perspective and a proactive way to add some insurance to your deals.
Quote:
On 2004-02-06 11:02, rajwarrior wrote:
Lori,
That is just another benefit of owner financed deals like LOs and CFDs in my opinion.
A tenant or buyer in a LO/CFD will pay more down (nonrefundable), more per month and take better care of the property than a straight rental deal. At the end of the contract term, IF they choose not to buy/refinance, then the investor gets back a house that is usually in better condition and higher FMV than they sold originally.
Also, yes, some contract buyers do choose not to buy the property. BUT, it's been my experience that most don't because the investor didn't take the time to help them thru the contract term to prepare for buying/refinancing.
Personally, I have them sit down with my mortgage broker BEFORE they sign the contract, and decide IF at the end of the term, they would be able to buy. We look at their credit, and tell them what they can do to fix and rebuild it in that time frame. We've even went so far as to create a budget for the tenant/buyer so that they wouldn't overspend and put themselves in the same position as before. By contrast, 70% of our customes DO end up buying the property.
Roger
Roger
It's good to hear that you are getting those numbers. Pgh is definately not near those numbers I checked with the Ex pres of our real estate club. He has over 400 properties and his ratios are less then mine.
Good Luck
Lori
[addsig]
Update: Still Waiting. Bank did a Desktop Review and Field Review on Friday. Waiting to see what sort of numbers their people come up with.
RealEstateGuy:
What do you do to minimize the length of time it takes to get the call from the bank?
jrod3172:
I am working with a Mortgage Broker. The bank they are using is here in Atlanta. The loan consists of a 1st at 75% and a second at 15%.
georgenations:
Great Idea! I will definitely add this to my list of prequal items.
rajwarrior:
Great advice. I do have a local bank that will write 3 year ballons for me at 80% (they keep them), but this deal is too far away from them. Lesson Learned.
Also, I am forecasting funding both my 2003 and 2004 IRAs to help build my reserve with the cash out.
I firmly believe in helping the buyer improve their credit so they can buy the house. I will turn them over to a banker to help get them ready once they are in the lease option with me. I really do prefer getting out of the property in a couple of years. Gives me more mobility.
Thanks again everyone for all the advice! I will let you know how it goes.
JohnCl
Good Lord!! - as a newbie RE investor, just following the conversational thread on a posted topic is incredible. Appreciate all the honest and informative responses from members to this site.
Quote: Put the difference between this and what you bought the property and did the repairs for in your pocket tax free.
I do not know the taxation specifics, but I doubt that the cash from a cash back refi is tax free.
Brenda
Brenda I think by taking a loan on the equity then doing a 1031 would allow the CG to be had tax free, the tax impllications would come only when a property is sold and there are CG.
if I am wrong on this I am sure someone will speak up.
Quote:
On 2004-02-16 23:10, smack67 wrote:
Good Lord!! - as a newbie RE investor, just following the conversational thread on a posted topic is incredible. Appreciate all the honest and informative responses from members to this site.
Welcome to TCI. That's how it is around here!
Josh
[addsig]
Disclaimer: I'm not a tax expert.
If you borrow money it is not income right? the USA only taxes increase, productivity, and enterprize, (and interestingly they subsidize unemployment and unproductivity) If you cash out refi you still owe the money to someone. It wasn't income, You didn't "earn" it, it wasn't positive numbers on your account on the contrary it costs you (luckily your tenants pay it back for you) You now deduct your intrest on your taxes and spend your money as you see fit. (they will get you on the sales tax) Dolf De Roos explains it well in his book about increasing the value of a home for little or no money. Good luck
Josh
[addsig]
Brenda,
The cash from a cash-out refi is tax-free for now. you are just delaying it that's all.
To use simple numbers:
If the house cost you 40 for purchase and rehab, it's worth 80 and you get a refi for 60. The 20K that you get now (60-40) you can enjoy tax free. BUT, when you sell the house, you pay taxes on anything over your 40K basis, so if you sold it for 80, you would pay taxes on that 40K in gain. This is where the taxman cometh....
And even if you did a tax-free exchange, the basis price carrys over to the next one so you are still just postponing the tax (not that it's a bad thing)