As home price appreciation has slowed in some markets, the rental markets have continued to stay red hot. Many buy and hold, or rehab and hold investors have seen the value of their rental portfolio grow over the last year. As we see some markets start to flatten out, this is allowing rents to catch up to home prices. This bodes well for buy and holds and is shaving margins in many markets for the flipper. As lending, well at least bank lending, still remains tight, there are more renters now than ever before. Higher rental rates and lower vacancies make many markets great rental markets. Remember your strategy should vary by your investment objective, your region and the property types you purchase.
From a lender perspective we see a higher propensity for buying to rent or rehab to rent in the Midwest and the South vs a higher propensity to flip in the Northeast. We see in the higher priced market more fix and flip loans, but in markets where home prices are lower, many investors are buying to rent. The lower home prices allow the property owner to charge a more competitive monthly rent and still see a reasonable return on their investment.
Here are some of my tips for buying and holding a rehab
- When you list a property for sale, list it to rent at or near the highest rent in the area. If you get an offer to rent at or near top dollar, consider taking it.
- If that perspective tenant shows a desire to buy the property in the future, consider renting to them with an option to buy. This lowers your cost basis on the property and at the same time you could have an exit strategy.
- Try and buy properties in a strong rental as well as sales market.
- Rehab better than your competitors – if you’re rehabbing to rent, fix up that property to a higher level, this will get you higher rents and more than likely longer term tenants. Remember rental markets in many areas are strong and there is more competition for those renters that will pay top dollar.
- Be mindful of paint colors. I would suggest standard colors throughout. Using 1-2 standard colors saves time in the future on touch ups if/when the tenant moves out.
- Paint finish – I use satin finish. This allows you to scrub out minor spots, which can save you money down the road.
- Appliances – dishwashers, washers and dryers – you will get tenants to pay more with these amenities.
- Make your kitchen and bath the star. I still see so many rehabbers using Formica, with granite prices, especially level I granite, just a little more than the cost of Formica, don’t skimp on this.
- Central heating and Air – a tenant willing to pay top dollar is looking for this. It saves them money on their hearing and air conditioning bills, which leaves them more money to pay you! Have you ever removed a window AC unit? Chances are you have and window and window sill replacement probably followed.
- Floors – wood or tile over carpet in rentals. Wood is easy to sand and refinish, tile lasts. Chances are if you are renting and you have carpet in there, it will need to be replaced after your tenant moves out.
One thing I hear from a lot of my investors is that if they hold, they are tying up their available cash to do more deals. This is where we come in. By listening to our investors over the last year, we have developed a loan program that allows you to rehab, refinance, cash out and then move to your next project. Below is an example of how this loan works.
Purchase price – 100k
Rehab – 50k
ARV – 225k
Loan amount 120k + 6k closing costs rolled in = 126k owed upon sale or refinance
Initial borrower cash in the deal 30k
Rehab is completed and now the property appraises for 225k.
Our 30 year program for completed properties (max loan to value) with NO seasoning requirements, is 75% of the as is value.
225k x 75% = $168,750
$168,750 loan amount – $126,000 (your payoff from our rehab loan) = $42,750 cash out before closing costs
Your initial cash out of pocket for the rehab was 30k, you can now cash out $42k from the same property when the rehab is completed (less closing costs) and get your initial investment back.
This leaves you with a property that is rehabbed, ready to rent, and you have all of you funds back out after the rehab is completed, ready to do more deals.
So, if you are thinking about holding your current rehab, or you are looking to rehab then rent that next property you have under contract, get in touch with us to discuss your options.
Read more about our loan programs here hardmoneyman.com