Author Topic: How to finance rehab of house  (Read 4432 times)

52cents

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How to finance rehab of house
« on: March 16, 2014, 07:55:51 AM »
My wife and I stumbled across the opportunity of buying the neighbors house at auction for the price of a new car in cash. The neighborhood is definitely on the up and up, lots of new construction and young families moving in. The house is an absolute ruin and will need completely gutting to eliminate the cat urine smell and mold. The plan is, to rehab and add to the house this year and then move into it. We would hold on to our current mortgaged house and rent it out.
I'm not sure of the right way to finance the project. I can use our cash reserves and be living in a paid for house in a year. Or we can take out a HELOC on our mortgaged house and invest the cash instead.
I'll do all my own work and we'll be getting by on just my wife's income. Can anyone see any huge holes in our plans?

Thanks.

Daleth

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Re: How to finance rehab of house
« Reply #1 on: March 16, 2014, 08:20:01 AM »
HUD 203(k) loans are designed for this, but as I recall they require you to use an approved contractor. That makes rehab more expensive but also less likely to stall when some fly-by-night contractor takes your deposit and runs.

Here's a link:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou

Many banks don't do this kind of loan so you'll have to shop around online to find ones that do, and compare them.

Weedy Acres

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Re: How to finance rehab of house
« Reply #2 on: March 16, 2014, 04:49:57 PM »
If it were me I'd cash flow it.  I don't like borrowing money and paying other people interest unless it's unavoidable.  And in this situation it's avoidable.

chasesfish

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Re: How to finance rehab of house
« Reply #3 on: March 16, 2014, 05:23:40 PM »
Cash flow it, you'd need a GC on any construction type loan.  Consider taking out a Heloc on your existing house for a contingency

slugsworth

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Re: How to finance rehab of house
« Reply #4 on: March 17, 2014, 12:37:37 PM »
I would strongly advice against an FHA rehab loan for a few reasons. #1) The FHA program has greatly increased its mortgage insurance premium, I think you would be hard pressed to pay less than $100/mo in Mortgage insurance which is just money down the drain #2) there is a huge up-front mortgage insurance premium (MIP). If you are seriously considering that option get a GFE/TIL early on in the process so you know all of the fees you are looking at - they are extremely substantial.

Paying for it in cash would be the easiest option - you could potentially take out a loan on it for 80%LTV or less afterwards if necessary. However, be aware that most banks will be looking at your total income (not including any rental income you haven't had for 2 years!) when making that loan.  I guess, being conservative, I would take out the HELOC and plan not to use it, but at least have it if you find out that there is some huge repair that you missed in your due diligence.

lackofstache

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Re: How to finance rehab of house
« Reply #5 on: March 17, 2014, 02:44:06 PM »
I'd cash flow it & have the HELOC in place as an emergency buffer.

52cents

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Re: How to finance rehab of house
« Reply #6 on: March 18, 2014, 12:48:30 PM »
Thanks guys. Seems like everyone agrees. Cash it is.
Fingers crossed, we'll be backing in the dumpster in a couple of months. Here's hoping I'll be telling a success story next year.

Milspecstache

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Re: How to finance rehab of house
« Reply #7 on: March 18, 2014, 09:43:44 PM »
I would love to hear more of the money-side of it.  How much you are estimating for materials/labor/etc and how you come out in the end.  I love construction and it sounds like you will be deep in it.

phred

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Re: How to finance rehab of house
« Reply #8 on: March 19, 2014, 11:56:47 AM »
There exists a chemical enzyme you can spray inside the house to get rid of the cat urine.  Rehabilitation companies use it all the time.  Get the industrial/commercial grade, and not the stuff you can buy at the bigbox.  Sorry, I don't know the trade name.
   As to the mold -- find out why the mold is there so you don't just rebuild the same problem.

   Rebuilding a house while living in it frequently causes couples to divorce.  Maybe MMM has some advice on this.

52cents

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Re: How to finance rehab of house
« Reply #9 on: March 19, 2014, 07:01:25 PM »
I would love to hear more of the money-side of it.  How much you are estimating for materials/labor/etc and how you come out in the end.  I love construction and it sounds like you will be deep in it.

Any face punches are welcome.
I've not started to estimate materials and labor. I'm a contractor/carpenter by trade and will really be doing most of the labor myself.  I'm in the design phase right now. I won't even tackle the project if I don't think I can pull it off. I really just need an extra hand for most stuff except electrical and plumbing. Now MMM has planted the idea of radiant heat in my head I may be doing some of that myself too.
 
My conservative estimate is that if I can do it for less than 100k, the house and property will result in doubling the initial investment: 25K for the house and property + 100k improvements will be worth at least 250k (looking at comps in the neighborhood).
Hoping to pull it off for much less. I'm basically taking an absolute crap hole, gutting it and doubling the footprint from 600 to 1100 or so sq ft.

52cents

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Re: How to finance rehab of house
« Reply #10 on: March 19, 2014, 07:11:40 PM »
Rebuilding a house while living in it frequently causes couples to divorce.  Maybe MMM has some advice on this.

We won't be living in it until it's finished/close to finished. We still have our primary house next door.
The place seriously needs gutting. There won't be a trace of original wood when I'm done.