Quote:
Originally Posted by bwana devil
spex, thanks for the replies.
you mention a few times that you refinance your properties after you fix them up. what is your goal? are you pulling cash out or are doing it to get a better rate?
It really depends - the answer is both. Most of the time my properties are seen by the bank as a less than desireable risk. So I have to agree to pay a higher interest rate up front and hope that when I get the property up and running properly a bank will refi me to a better deal. This is somewhat risky for me because there is certainly no guarantee that any bank will be interested when it is time to refi, and beyond that, there is no guarantee that I'll be able to get a better rate later on. So I plan to refi, but I assume that its not going to work out. So I have to be sure that at the current terms I can service my debt and still be okay cashflow wise and still make the kind of ROI that I want - those three are like differnent arms of a mobile and they have to stay in balance in order to work.
What I normally do now is get the property and pay most or all of the fix up out of my pocket rather than relying on the banks. I then refi to get my money for renovations back out. I don't normally refi out any more money until I need it. I don't normally refi my down payments back out, although I know some investors that do.
Something too that you should be aware of is that the vast majority of the time I get a check at closing when I'm buying a property. I get the prorated rents for the month in which I'm buying.
You have to be smart about when you're going to close. Like, if I were to buy a 15 unit building that rents for $450 per unit and we close on the 1st, I should get a check for $6,750. If we close on the 15th, I should get a check for $3375. If the seller is smart then he'll ask you to pay the portion of the mortgage payment for that month - its only fair since he already paid for that month and you're taking part of the rents. That is fine. See, the principle portion of a mortgage payment is made in advance - so you should pay a prorated portion of the prinicple. However, the interest portion is paid in AREARS. There is no reason why you should pay him for any obligations before you took posession of the property.
Another thing. Before you schedule the closing date, find out from your bank when the first payment will be due. If you close on the 25th of January, maybe your first payment will be due on March 1. But if you push the closing to February 4th, your first payment might not be due until April 1. You see the difference? In the first scenario you get to collect prorated rents for a few days of Jan, and full rents for Feb before you've got a payment. In the second scenario you get prorated rents for almost of Feb, and all of March. In a 15 units property that is a differnce of several thousand dollars in your pocket. This is money that you can use to fix up the property.
Ok, so I said all of that to make a more general point. I don't consider the money that I use for fix up in my COCR calcs. That is because I'm planning to refi out all of that money within one year. If it so happens that I can't refi the money out, well, I still make a decent return on my capital, but nowhere near the 25% COCR that I want to get. So I do decent instead of great.
One thing to be aware of too is that when I first started doing this it was a constant struggle to get the banks to work with me. They always wanted 2 years of financials on the property. Obviously I'd just filled the place, so I didn't have those kind of numbers. It helped though that I was still only cashing out a small portion of the value of the property, so the LTV was still somewhat low given the new valuation.
Anyway, basically, if you buy the property right up front that gives you so much more wiggle room to deal with lenders because it limits their risk.