I just received a comment on a previous post asking why I wouldn’t consider renting out The Yellow Stain House. This is a question I get often, and also one I’ve asked myself often. While in theory, renting this property makes a lot of sense (the numbers work well), there are a couple practical issues that make it difficult to take this route at this time:
- Most lenders have â€œseasoningâ€ requirements before they will refinance. In other words, they require that the house be owned for some period of time (generally 6-12 months) before they will consider refinancing it. While it is possible to find lenders who will refinance in shorter periods of time, they generally will only finance up to 65-75% of the *purchase* price, as opposed to the appraised value. So, as an example, I bought The Yellow Stain House for $60K, I would have to put $10K of work into it to rent it (plumbing, flood letter, foundation, etc), and if I were to refinance in the next 6 months, Iâ€™d only be able to pull out $45K (75% of $60K). While this is certainly an option, it would still leave me with $25K in the property, which hurts my rental ROI numbers (and ties up my cash). The other option is to wait 6 months, and refinance based on the appraised value; but again, it would require tying up a lot of cash for at least 6 months;
- Because I donâ€™t have 2-years of verifiable income in this business, I currently canâ€™t qualify for a loan (I don’t meet the income requirement) without a partner or someone else to co-sign. Generally, this means giving up a percentage of the profits to whomever takes the risk of co-signing. Considering Iâ€™ve put up all the cash and have done the majority of the work to this point, Iâ€™m hesitant to give away any profit simply for someone to co-sign a loan. While I would consider partnering with the person I partnered with on The Bulge House or the person I discussed partnering with previously on this house, the dynamics of partnering at this stage of the project are a little weird.
All of that said, Iâ€™m not completely averse to taking this road, if necessary. In fact, if I were a year further into this business, Iâ€™d probably be jumping at the opportunity to hold this property as a rental (the numbers work very well).
But, right now, Iâ€™d really like to get a couple more resales under my belt, if for no other reason then to keep me motivated. My wife and I have discussed so many potential exit strategies on this property, and we come back to the rental option often; but for now, I think we both agree that it would only be a last resort if we find we can’t resell the property.