Best way to fund rehab properties - Posted by Bob

import · February 13, 2003, 10:19am

Posted by Zack on February 18, 2003 at 15:24:01:

Understand these are not mortgages that cash flow. I make no downpayment or monthly payments, so I have no out of pocket expenses and the lenders I use are not people who lend money regularly. We look at each property as a partnership and therefore I don’t see it as a high interest loan(which is what it really is).

import · February 13, 2003, 10:19am

Posted by Bob on February 13, 2003 at 11:19:02:

After 25 years in Information Technology I was laid off last Oct. I?ve decided to start a new career in the Real Estate Rehab business. I am currently in the process of preparing my own home for sale, with the intention of using the proceeds to begin my business. I’ve ruled out keeping the house because I’m recently divorced and want to move on.
The house should sell for a little over $200,000 and I currently owe $95,000 on a credit line. I have $20,000 in cash and $31,000 in a 401K account. My credit should be pretty clean. I plan to marry shortly so my short term financial needs will be taken care of until I get up and running.

What would be the best way for me to get started in
terms of funding my purchases based on my profile?

Should I wait till the house is sold to get started?

What would be the pros and cons of using my own cash?

If I were to borrow from a hard money lender how
much could I expect to have available so that I know
what price range I’m restricted to?

Any and all opinions are welcome
Thanks
Bob

import · February 13, 2003, 4:13pm

Re: Best way to fund rehab properties - Posted by IB (NJ)

Posted by IB (NJ) on February 13, 2003 at 17:13:56:

Hi Bob. You’re going to have a tough time finding hard money if you’re brand new. And like Zack stated, it’s risky and expensive (which is why after using it for 2 years, I’m phasing it out of my investment strategy). If I were you, I would partner with someone REPUTABLE and experienced. That way, you won’t have to put up all your money AND the risk is minimized when you’re working with someone who has done rehabs before. Or maybe you CAN use all your own money (incl. credit) and partner with someone who has the exp. but is short on funds.

import · February 13, 2003, 1:52pm

Re: Best way to fund rehab properties - Posted by Zack

Posted by Zack on February 13, 2003 at 14:52:26:

When I rehab properties I like to have a private lender give me the money and split the profit. This way I have none of my own money in the property and no payments to make every month. It allows me to do many more deals than I would be able to do with a conventional lender and at less risk. As far as hard money goes, I’ve never used it, but it seems risky unless you immediately refinance or flip it. I’ve considered it a few times, but when I put the numbers on paper I end up having to give away half the profit or more to interest and points and if I’m going to give away half the profit I would rather do it on the backend and not make payments. You could consider rolling your 401K to an IRA and find a few friends with money in their IRA then loan each other money to purchase properties. This can get complicated so I would suggest talking to your CPA if you decided to do it. Mid-Ohio Securities Corp. does alot of real estate IRA’s they can explain how it works. Hope this helps.

import · February 14, 2003, 9:25pm

Re: Best way to fund rehab properties - Posted by Strange Tanks(Philly)

Posted by Strange Tanks(Philly) on February 14, 2003 at 22:25:55:

Hi Bob:

Where in NJ are you?

In my opinion, cash is king. It sounds like you have enough cash on hand to start out. I’m also starting out in the rehab biz, and use an equity line of credit for my deals. I try and keep as much of the money as I can from my hard work. So far I have run across several deals that I just don’t have the financial muscle to do, I’m working on getting these under contract to wholesale. I’m not worried about turning over fifty properties in my first year, but I am interested in getting the most out of my own hard work.

Strange Tanks

import · February 13, 2003, 4:16pm

Re: Best way to fund rehab properties - Posted by IB (NJ)

Posted by IB (NJ) on February 13, 2003 at 17:16:32:

Hi Zack. I’ve been using hard money for 2 years now and it’s pretty expensive. I’m now working on a proposal for private investors. I have a couple of questions:

Do you secure your investor’s money with a first mortgage on the property?
What type of return do you offer your investor?

import · February 13, 2003, 3:00pm

Re: Best way to fund rehab properties - Posted by Bob

Posted by Bob on February 13, 2003 at 16:00:20:

What type of legal instrument do you use to protect both your interests when you use a private lender?
Thanks
Bob

import · February 13, 2003, 5:04pm

Re: Best way to fund rehab properties - Posted by Zack

Posted by Zack on February 13, 2003 at 18:04:48:

Yes
I usually do a 50/50 split plus 6-10% interest with a 12 month balloon. Sometimes we do a straight 50/50 or 60/40 split. I am in the process of structuring a deal now with a guy where I will pay him 12% simple interest on the backend, he’s happy because his money is in a money market account now earning 2-3% and it’s a better deal for me because I don’t pay nearly as much interest.

import · February 13, 2003, 5:05pm

Re: Best way to fund rehab properties - Posted by Zack

Posted by Zack on February 13, 2003 at 18:05:46:

I take title in my company name and the lender secures his interest with a deed to secure debt.

import · February 18, 2003, 2:13pm

Re: Best way to fund rehab properties - Posted by IB (NJ)

Posted by IB (NJ) on February 18, 2003 at 15:13:44:

50/50 PLUS Interest? Isn’t that kind of expensive? I’m asking because at the most recent Lender’s conference, Terry Vaughn suggested something like a 12% return plus $2500-3000 ‘exit bonus’ secured by a first mortgage on the investment property. Like you stated, the only alternative most investors have these days is a money market account paying 2-3%.