If you are looking for a long term creative real estate investment plan, then rehab, refinance and cash out might be the plan for you. It works best in a buyers’ market where the housing prices have remained flat or are dipping. This long term holding strategy will provide you with income for many years and can help you to create financial independence.
For this plan to work, you will need to find a buyer who is very motivated to sell. It might be an out of town owner or someone who just needs to sell quickly and the house will need to be in a bit of disrepair. You offer the seller 60% of the post renovation value. You purchase the property using a hard money lender who will typically lend up to 65% of the post renovation value of the home and use the excess money to make the needed repairs and renovations. Once the renovations are completed you refinance with a regular mortgage and cash out by refinancing 80-90% of the new value. The money that you get from cashing out is then reinvested into your business. It is crucial that you always reinvest the cash out funds to insure that your business continues to grow.
Now turn the house over to a local property management company to rent for you. The key for the renting portion of this process is that the rent needs to cover the loan cost, any fees and the property management fees so that you have positive cash flow from each property. It is not advisable to maintain the duties of landlord with these properties because over the course of several years you will end up having quite a large number of them. It is far more cost effective to hire a management company than to stray into that business as well.
This process is considered to be an option for an advanced investor because it would require paying up to six months carrying costs for the first project before you could see any revenue coming in. That can be a long time and there are many other plans or options to turn a faster return on investment when you are just starting out. But for a seasoned investor, this is a way to take the next step and grow your business in a way that will continue to generate income for the future.