Step 1: Buy
Step 2: Rehab
Step 3: Rent
Step 4: Refinance
Buy, Rehab, Rent, Refinance. This is a methodology of buying properties in cash, without taking out a mortgage, renovating them to increase their value, and then taking out a mortgage in hopes of recouping most, all or even more than your initial investment in the property.
Let's say you buy a property for $100,000 and rehab it for $50,000. Your investment is $150,000. You then rent it out for $1,500/month. You go to a bank or private lender to refinance the property. The property appraises for $200,000 because of the comparable home sales in the area and the monthly rental income you were able to demonstrate. You refinance into a mortgage loan with a 75% loan-to-value (LTV) ratio. This means the lender gives you $150,000 back which you can use for your next deal. You now have $50,000 in equity remaining in the property. Your outstanding loan principal is $150,000 which you will be paying down with interest on a monthly basis.
Keep in mind, you were able to buy off-market for a discount, and renovate cost effectively. This is the primary contributing factor to the $50,000 spread between your investment of $150,000 and the appraised value of $200,000.
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