Why Rehab For Cash?
I was just curious as to why most people seem to be rehabbing for cash. I have done this before but I prefer not to. Myself, I like to rehab and then refinance to get my cash out. Then I have a steady cashflow and I don't have to pay income taxes on the increase in property value. It seems like if you are rehabbing strictly for income, you would have to continually rehab year after year. If you make more cash than you need to live on you have to invest it. What better investment than rental? I'm not saying the way I do it is the best way. I was simply curious about what other people are doing.
I always found it difficult to refinance to get cash out of a building when it was an investment property. I didn't think that lenders liked to do those loans. They usually charged higher interest rates.
The rental idea is a good one. I have quite a few rentals myself. But, if you pulled out all of the equity in your buildings, when you sell them, you still will be taxed on the profit. If you don't have the cash to pay the IRS, you might have difficulty...
They do charge a higher interest rate when you cash out, but it hasn't seemed to bad in my experience. I also have not had any difficulty getting these www.loans.I have one rental I cashed out last month and the interest rate was 6.75%. The property still cashflows well. I was just curious as to whether many people are simply rehabbing and then living off the money while they do the next rehab and so on. If you like rehabbing that would be fine. Personally, I like rehabbing when I know its an investment. I don't think I would like rehabbing myself if it simply became a job that I had to do everyday to pay the bills but thats just me.
davmille,
I am with you on this one. The thought of having a positive cash flow property with net no money down is very appealing with the likelyhood of doing it again and again.
Quote:I was just curious as to why most people seem to be rehabbing for cash.
davmille,
I, like you, prefer to be a landlord. I have never just sold a property after rehabbing, but I do have a couple of close calls.
I bought a foreclosure property in 1999 for $49K and put about $9K more into the rehab. I ended up with a property that would appraise between $85K and $90K at the time. My initial thought was sell the property for a quick $30K profit. I ended up keeping the property as a rental because it generates about $225 monthly cash flow. I could have sold the property and been happy with $30K profit. At $225 monthly cash flow, it will take me 13+ years at constant rents to make that same $30K. Today that property comps at $130K and I probably will put it on the market at the end of my tenant's lease.
The second property is a small 2/1 condo I purchased for $54K at the beginning of this year. I ended up putting about $12K into the property. The property comps for $75K right now but the rent is only a few dollars ahead of breakeven. I can sell for a $9K profit today, or keep the property for the tax shelter and hope future appreciation meets my expected targets (we are looking at a projected 20% growth rate over the next five years). Keeping a breakeven rental would not make a lot of business sense if this were my only property. Because I can use the tax shelter to offset other rental income, then this property does seem to have a place in my portfolio right now.
In each of these two cases, if I had no other property, the smart decision would have been to sell and take my profits. For the first property, the profits alone would have allowed me to purchase two (maybe three) other income producing properties for a long term rental portfolio. As for the second property, a profit now in the face of a breakeven cash flow and uncertain future appreciation would seem to be the wiser course of action.
Perhaps these two real life examples illustrate why (for some) it might be better to sell that rehab and take the profits.
In my area, I have found quite a few lenders that will do 90% LTV and around 6.5-6.75% on non-owner occupied properties. I always take 90% of the ARV and I know that is the most I can take out of the property once I refi it. From there, I minus repairs, closing costs, etc and come up with the max I would pay for the property. The idea is to be able to fix it up and then refi to pull out ALL your money that you have in it. Then when you put a tenant in, your ROI is infinite because you have NO cash tied up. Just my 2 cents.
Jason
jhadd,
With this strategy, your ROI is always infinite, even when you have a negative cash flow. The caution here is that a high LTV refinance might make your debt service larger than your net operating income.
Quote:
On 2003-12-21 00:55, DaveT wrote:
jhadd,
With this strategy, your ROI is always infinite, even when you have a negative cash flow. The caution here is that a high LTV refinance might make your debt service larger than your net operating income.
DaveT,
Good point. That's why I always calculate my debt service based on the 90% LTV if thats what I need to pull out the cash. Sometimes we only have to go to 80% which is better. I will never enter into a deal that will not produce a positive cash flow. It if is decent cash flow (150-up/month SFR), then it is a go.
Good point though !
Jason
Having recently divested and rejoined those shorn of property, call me newbie. It is with a great deal of amusement I watch my children cope with the usual ongoing problems of property management. The management organizations I set up prior to my leave taking are great at the little things of mangement. They can pick up rents, they can lecture property managers and yes even on occasion enter into the meetings over new roofs or plumbing repairs. But to advise on when to sell and how to sell. Yip. In this area they are highly challenged..
Of course most of my accumulations were the properties that others could not or would not handle. They were in years gone by excellent training grounds for those troops expecting postings to DownTown Baghdad. But now days all is peace and quiet. Still, my theory was always to have the owners keep their fingers in the pie and be present to some degree and responsive to the needs of tenants. That was my theory on how to avoid slums or how to make slums stop being slums. Fosters theory of non Absent Landlords. Well the newly enriched are not buying it. They do not want to spend time in areas of minimum income. Soo I have suggested that they now divest themselves and once again set up a program whereby they come back in paper and just count money. The tenants to be formed into Coop's which then own the properties. Worked before and I guess it will work again. Still, I really hate to see it all go. But wot the hell it is better. I must attend some of the meetings, they were always a kick. Watch the leaders emerge. Besides, 12 times gross can't knock it. Too bad you can't take it with you. Golden years es Nada.
Now the containers are being considered for small apartment houses.
Infill on R-3 zoned lots. Light multidwellings under eight units. Back to the drawing board. ooops I am dating myself, I meant CAD of course....
Changes, Changes, thank god. Lucius
I like to Rehab for cash and also like to hold a few for rental. I actually like to be hands on with my rehabs and enjoy the work much more than the other "professional" jobs I've held. One big reason that I don't keep more of the houses is because my husband doesn't like landlording and truth be told I don't care much for it either. I have found that I have less problems renting single family houses than 2 families. The renters seem to feel more like owners when they are in a house. In my area of the country it is hard to get enough rent to make cash flow on a single family. The average 3 bedroom ranch or cape here rents for about $625.00. Most of the time PITI is about that much. Anyway, like I said. I do both. I sell one, take the cash and maybe keep the next one but I think that 5-6 houses for rent will be all I ever want to have and my husband grimices to even hear me say that. He would rather rehab and take the cash anyday. 4-5 a year now at average 10K isn't too bad plus 5 or so to sell at retirement. We also have a lot going on in other areas like the stock market.[ Edited by Sandbahr on Date 12/21/2003 ]
Hey Guys/Gals,
One thing I realized when forming my plan for rehab investments is that, even if I plan to rent my single family property, I'm not going to rent it for 30yrs. An option for me was to refinance and do an interest only mortgage and pay on the principal with some of the excess money from cash flow. Instead of my monthly payment being $650, now they are $300. If I were to not have tenants in a unit for a month, I would only pay 300. But when I had tenants, I could pay as much on the principal as I wanted. The downside is that the interest rate will probably fluctuate depending on the type of program you use. But I only plan on holding the property until I can get started and finish my MBA. This plan is also assuming your FICO is around 680 -700+.
My point is, form a plan and explore all of the options that will help you reach your goal. You may have to be little creative but you can work it out and save yourself a little money in the process.
Good Luck
[ Edited by karonnb1 on Date 12/23/2003 ] [ Edited by karonnb1 on Date 12/23/2003 ]
There are many that are loan challenged to get cash out in my area. The lenders that we have had to choose from definately are not investment property freindly. Not a great deal of option for lenders here in TX - don't really know the true reason why but a lot of lenders find out we are in TX and nix on talking to us any further. We are finding our most profitable way to finance is owner fiancing or contract for deed for the cash flow and "fico" issues. (and us in the 700's)
We rehab and hold mostly (we are continous cash flow oreinted), do new construction for our sales and jump into occasional joint ventures if the management and return $ of such is good. No apts yet but are looking at this as our next step.
We aren't afraid of the questionable areas just like Lucious we find ways to make these work.
If rehabbing to get cash would work better in our area we might do it but our market is not such at this time.
karonnb1,
You may soon find out that the REI path is much more profitable and secure than the MBA path.
I went medical... Let me just say that had I spent the last ten years in REI... well, live and learn.
Just my unsolicited $.02.
In regards to selling or holding, we have about five duplexes and quads. That's our base -we'll buy about five more or one 10+ apartment building.
Where we'll make more $ is with reahab and sell or lease options.
Thanks,
OnTheWater