While devising several exit strategies for Offer #18, I realized that doing a big rehab on a house and holding is a double-edged sword. First and foremost, no matter what property you purchase for an investment, it should be purchased as an investment and not for speculation. But even if you purchase a property to rehab, you run into the problem of getting an immediate return on your investment if you decide to hold it. For Offer #18, I guesstimate repairs at around $15k-20k. Add in another $3k-5k for buy costs, and I'll already be in the hole an average of $22k. Now, if I decide to hold the property - whether through a straight rental or a L/O - I'll still be digging myself out of the proverbial hole for a long time. The only time I'll "break even" is (1) when I sell, or (2) after the rent and mortgage paydown has my running balance seeing black. This is an interesting conondrum I hadn't thought about until now. With Offer #6, I will have only $600 or so in repairs and another $4.5k in buy costs. I can quickly make that up with an option fee on a L/O, and start seeing positive cashflow immediately. Again, the big positive on doing rehabs and holding is when you actually do sell the property, you will probably get a LOT more back than if you rehabbed and immediately flipped it.
I guess for my position, I would either do a double close with a rehabber and get a $5k or so fee, or do the rehab work myself and flip retailfor a big payday. Either way, I won't be holding it as a rental or L/O. This early in the ballgame, I can't afford to be $22k+ negative in the hole upfront.
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Thanks for the compliment, BG! I agree we you about leveraging other properties instead of using it all on one. At this point in my career, I can't afford to buy and wait as I won't have many properties in my portfolio. I need to be thinking of building cash reserves for more leverage.
BTW, sorry to hear about your recent offer getting nixed. I always look take the positive in every offer, whether it is accepted or not, as a learning experience. We can read books and listen to tapes from now until the end of time, but nothing beats experience.
Okay, I have to retract almost everything in my original statement, because I forgot all about refinancing to pull cash out. Let me try to explain ...
While it is still true that I'll be ~$22k in the hole (actually more like $23k by my latest calculations), I can do the repairs and refinance the property to pull cash out to recover my upfront costs. The way I figured it, I would need about $28,500 in order to recover all my upfront costs, refinance costs, any penalties on the original loan, and keep a little for cash reserves (3 months holding costs at a minimum). Once the rehab is complete, I could then refinance at the ARV price and pull out the required $28.5k with a new loan. I figure if I close in mid-April, refinance in late May, and get a 2yr L/O T/B'er in by Aug 1st, I will still have positive cashflow. If the T/B'er exercises their option at the end of 2 years, I will stand to make a profit of about $24k. If they don't exercise the option to buy, I'll only see a profit of about $700 but will have over $28k of equity in the house!
I know we are not supposed to over-analyze these things, but I'm glad I did with this, or I would have completely forgotten about the cash-out refi strategy.
Now all I need to do is get the house. :-)
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