Rehab, Refinance, and Cash Out

By
Real Estate Agent with V.E. Ridley Real Estate

Rehab, Refinance, and Cash Out

 

This strategy can lead to true long-term wealth and financial independence. This works very well in a buyers market like Ohio where prices have been quite flat for some time. You need to use this to augment your wholesaling for immediate income and retailing for bigger short-term profits.

 

"Rehab, Refinance and Cash Out" is a long-term wealth building strategy, and will be something you will be glad you did, as it is a long-term "buy and hold" strategy, and those are the strategies that lead to true wealth accumulation, and financial independence.

Let me explain how this works.

  1. You find a good middle to low-end 3 bedroom home that you are able to buy from an out-of-state owner, typically a bank, or other motivated seller, that needs a little work, and you buy at 60% of after repaired value. (You buy the house using a hard money lender, or cash. The hard money lender will typically loan you up to 65% of the after repaired value to purchase the house which you use to buy the house and then repair it.
  2. Do your fix-up
  3. Now that the home is repaired you obtain an investor friendly mortgage and cash out by refinancing at 80-90% of after repaired retail value and you should be doing this with properties where this strategy gives you back at least $10,000 at the refinance that you can use in your business any way you need.  Do not use this money to live on, use it solely to grow your real estate business.
  4. Have a property management firm manage the property, and put a renter in the house.

Once you have done this strategy on 10 homes, you should be able to keep finding better, and better deals, because you can close quickly as you have "cash-in-hand" to make things happen. More cash equals better deals, and more opportunities. By the time you repeat this strategy 20 times, you should have at least $200,000 cash plus about $200,000 equity, and 20 homes giving you at least $2000 per month positive cash flow whether you decide to work this month or not, since you have a property management company handling things for you. With average annual rent increases, within five years that $2,000 a month should grow to $4,000 a month. In 30 years you should have $2 to 3 million plus in paid off real estate. It's a good solid long-term strategy to add to your immediate selling from wholesaling, retailing and lease options that the extra $200,000 in cash will help grow tremendously. The rent minus the management fees, and all loan and other costs must leave you with positive cash flow, or this strategy should be avoided. If you cannot cash out on the property, I don't recommend holding it long-term as you want to be able to use your best mortgages to cash out.

You can purchase using most rehab lenders if your Equifax credit score is above 625(which is bad/fair credit) or you have a co-borrower who has an Equifax score over 625. A good investor friendly mortgage company will give you good rates if you are at 660 middle score or above, and the very best rates if your middle score is 720 or above. Your first 10 investor mortgages in your name and 10 in your spouse's name, are the easiest to qualify, and get the best deals. After those you really need a good investor mortgage company to work with. Take the time to find the real investor friendly mortgage companies that can help you get loans for 100 properties, and not just the first ten, and let them have the easy ones and the tougher ones. I do recommend having more than one good lender available though, but stick to the ones that specialize in investor loans. Find out from other investors who the most investor friendly mortgage companies are to use to refinance the repaired home.

I do not advocate becoming a landlord, as I do not believe this is a valuable usage of your time and energy. I highly recommend asking around and finding a good property management company that will charge you 10% or less to start out with, and gradually lower that % as you add more and more properties. I feel this is an advanced strategy, as you won't see any cash in your pocket from this strategy for 4-6 months after you find the deal, which is a long time to work, and not see any pay. If you are wholesaling and making consistent money each month then it shouldn't matter.

This strategy will magnify the profits you make in your investing business in ways you might not have imagined. This strategy is a natural progression from wholesaling as you are already helping others find these kinds of deals, now you will be able to get the cash out typical of probably 2 wholesale deals, just paid slower, and at the same time building a nice future nest egg.

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a berry

How's this working out now with the mortgage crisis and credit crunch? Are investors still able to find investor friendly mortgages? I'm looking at this strategy as a possibility for me, but have concerns about banks right now. Anyone facing trouble in this area or finding it still a breeze?

September 13, 2008 08:16 AM #1
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Anonymous
Ron

It's all a great strategy until you try to do a 90% LTV cash-out refi

It may get done once, but that's a very high LTV for NOO.

 

The concept is great, but getting that cash out refi is pretty tough

75% cash out refi, probably not that tough

June 28, 2010 05:10 PM #2
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Rainer
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Beatrice Hobson

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