Let’s Talk About Fix-and-Hold Properties: Part 1

renovating a fix-and-hold property for real estate investing
Image by Laura Shaw from Pixabay

If you’ve watched HGTV or similar channels for any length of time, you’ve seen lots of programs devoted to “fix-and-flip” properties. Today I want to introduce you to the idea of a “fix-and-hold” property.

How is a Fix-and-Hold Property Different from a Flip?

Both fix-and-hold and fix-and-flip properties have this in common: you won’t be the one living there. In other words, these are both considered “non-owner-occupied.” That’s important when it comes to financing the purchase, which we’ll explore a little later in this post.

Where they usually differ is:

  • Real estate investors say, “With a fix-and-flip, you make your money when you buy but you get paid when you sell.” This means that the greatest return on investment comes from paying as little as possible to acquire a property. You only have so much control over what it will cost to renovate the property…and the market will determine how much you can sell it for. So the one area where you have the greatest control is in what you pay for the property. The lower that number, the greater your potential return. You also typically get paid within a relatively short timeframe; most fix-and-flips are completed and sold within 90-120 days.
  • Buying wisely is also important with a fix-and-hold property, but your payout happens over time as you hold the property and rent it. You may have a lower rate of return than with a fix-and-flip, but you’ll likely have it over a longer time span. Many investors hold their rental properties for decades or longer, sometimes passing them on to their heirs.

How Do I Buy a Fix-and-Hold Property?

Does the idea of a fix-and-hold property appeal to you? It did to me! I just purchased one in November (my third). This is yet another type of real estate transaction where I am uniquely qualified to assist you.

If a fix-and-hold property is on your wish list, you need to know your financing options well ahead of time. They are:

  • All-cash purchase – This was not possible in my case.
  • Conventional financing – You’ll need to put down 25% and have the cash reserves for repairs. On a $300,000 property with an expected $45,000 in repair costs, you’d need to have $120,000 in cash ($75,000 downpayment plus $45,000 for repairs).
  • Non-traditional financing – this is what we ended up doing. Lenders who handle these types of loans will finance up to 90% of the purchase price and 90% of the fix-up expenses (see Merchants Mortgage & Trust Corporation for more information).
  • Personal investor – This is a family member, friend, or other individual with large cash reserves or high liquidity who is willing to loan money for real estate investments. I have no experience with this, and I imagine terms and conditions would vary greatly. 
  • Loans from your self-directed IRA – If you have sufficient funds in your IRA to cover the costs of purchase and repairs, this option may make sense for you. I have no experience with this and recommend you consult your tax advisor, CPA, and/or other investment professional.

Why I Chose a Fix-and-Hold Loan (Non-Traditional Financing)

The biggest checkmark in the “benefit” column for a fix-and-hold loan is that the criteria for credit scores and debt-to-income ratios is much looser than for traditional mortgages. This makes it MUCH easier to qualify. These lenders also can close in two weeks or less. In our case, we were able to finance the $51,000 in estimated repair costs. These loans also allow you to refinance at a lower rate as soon as the repairs are completed. And unlike with traditional loans, you can do the fix up, act as your own general contractor, or use whoever you want to do the work. 

Some of the disadvantages to this type of financing include a high interest rate (9.25% in our case, but we only intend to keep this loan for a maximum of two months). There is also an origination fee equal to 2% of the loan amount, and we will also have the cost of refinancing once the repairs are done. These loans also require you to file paperwork for every “draw” (every time you take cash out for repairs), so you must document every receipt to get the money out to pay the contractor. 

All in all, this type of financing still made the most sense for us. Even though it will cost a bit more, it means we don’t have to drain our reserves. So in the end I get to keep my reserves and my peace of mind. 

What’s Next…

In my next blog, we’ll look at how to find fix-and-hold properties in Colorado’s wild real estate market.

Looking to Start Investing in Real Estate? Call Me!

If investing in real estate — either here in the Denver metro area or elsewhere — is on your to-do list for 2020, I would be happy to help! Please reach out to me at 303-204-6494.

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