Quote:
Originally Posted by Heyokha
I like Spex X's recommended model of: buying properties that are undervalued, forcing appreciation, refinancing & holding( or selling depending on the situation), and then repeating the process.
This strategy is great for those of us who have a good bit of cash on-hand, as well as good credit and income. For anyone else, this is going to be very difficult, as the refinancing landscape these days is pretty tough. If you attempt to refinance within 6-12 of purchase, the LTV will be based on the purchase price, not the appraised value. So, if you want to refinance within 6 months, be prepared to still have 30-50% of your own cash in the deal.
As an example, if you purchase a property for $50K, put $10K into renovations and then refinance in less than 6 months, you'll likely only be able to pull out about 70% of the purchase price, or about $35K. In this example, you'll still have $25K of your own cash in the deal.
If you have plenty of cash, this may be able to scale; otherwise, not so much.
The reason I say *MAY* be able to scale is that the next issue you'll face is the institutional limits placed on conventional lending. Specifically, no lenders will allow you more than 10 conventional loans these days, and most lenders won't allow you more than 4. So, if you want to scale above 4 (or perhaps 10) total loans, you'll need to find either a portfolio lender or a private lender. Portfolio lenders will go above 10 loans, but they'll want to see a decent amount of skin in the game, and will require a personal guarantee, so again, personal credit, income and assets play a role.
Private money is probably your best choice if you want to scale a rental business, but few private lenders will lend to you if you don't have a solid track record of success in this business. Plus, private money rates will be significantly higher than portfolio or conventional rates. Also, very, very few lenders are going to want to give you cheap money (less than 8% interest) for 20-30 years, as no private investor investor is going to lock up their funds for a long period of time at a low return when everyone expects interest rates to rise over the next 5 years, perhaps significantly.
So again, institutional lenders are your best best, but you need the cash, credit and income, and you will hit your maximum number of loans pretty quickly.
What many of us are doing these days is flipping houses to generate income and then plowing that income into longer-term rentals. Personally, I'm plowing my flipping income into lending, where the money is much easier and returns are much higher, but that's just me.
Anyway, my point of all this is that the purchase, rehab, refi and rent model is a good one, but the financing details these days are MUCH tougher than most people realize, and if you don't have a plan, you'll quickly find yourself in a tough spot.