Financing REOs in a "buy and hold" strategy

Financing, Hard Money Lenders, Private Money
1

My wife and I are starting a rental property business.

We live in So. Indiana and there are many REOs that after a few months on the market can fall into Property Manager’s 2%, $100 a door rule in rural and blue collar areas, not just war zones. We’ve read Rossi’s book and many others and feel prepared.

We have around $25,000 in cash to start the business with.

We are in the process of buying our first property, an REO for $7000 plus closing costs. I estimate the repairs on this property at around $8,000-$13,000. With luck, we will be all-in this property for less than $20,000 and have at least $5,000 for rental emergencies.

We are forming an LLC for this business. What can we expect as far as refinancing when we get this property fixed and rented in a couple months?

Our goal would be to cash back out the $20,000 we put into it. I would guess the property would appraise at 39K-49K. Will local bankers cash us out if the appraisal is high enough? Do these loans no longer exist because of the credit crunch?

With the cash, our goal would be to pyramid the business and buy our next REO for cash.

Is this the right way to approach financing?

Thanks for any insights.

2

In theory, yes, your strategy will work. But as we all know, Murphy’s law can always come into effect. Make sure you know what the ARV of your properties are, don’t just “guess”. It’s also very easy to get screwed over by a crappy appraisal, and not be able to pull out enough cash to cover your cost basis, so MAKE SURE you leave yourself a cushion of cash.
How’s your personal credit situation? Having little personal debt and good credit to start with is going to make your job a lot easier as well. Start talking to local bankers and find out what their lending criteria are, in relation to LTV’s, number of props, etc.

3

We re-fi’d our cash out of a deal by using a local bank. Now we generally just get the extra money we need for rehab when we purchase our properties. There’s no way for anyone here to tell you what will be available in your area unless they just happen to live there too. Your best chances will be to talk to the local banks. We’re getting 5 yr fixed 10 yr amort loans at 6.5% right now, but that could be way off from what you get.
Call your local banks and talk to the person who handles commercial loans.