Seeking Competitive Lender to Finance Completed Renovation

[Benjamin Hirsh]

Hi

I am a REI and W2 earner with a solid income and credit score. I own 7 properties. I have 2 properties I am currently renovating (all-cash purchase). I am looking for a competitive local lender who can finance the properties (at the new ARV or re-appraised value) without having to wait for the 6 month seasoning for conventional lending (especially with rising interest rates on the horizon). Any suggestions welcome.

Thanks in advance

Ben

[Andrew Postell]

@Benjamin Hirsh ok, so this is good to work through.  Let's cover some basic elements first. 

Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.  ALL conventional loans will restrict what you can do when you purchase a property with cash.  ALL conventional loans will not even allow a cash out loan if you purchased the property with a loan in the first 6 months.  ALL.  There is no choice here.  Because this is the Fannie/Freddie rule.  It's their money - their rules.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.  Is it possible that you won't have any seasoning on these loans?  Yes!  But you will pay for it in the rate or the term or some other feature.  It still might be worth doing of course but I need to analyze this ahead of time in order to make a decision on what is best.

The great benefit to either of these loans is that you can get PREQUALIFIED ahead of time.  That way you know what rules you will face before you get there.  We always recommend getting prequalified before hand.  What if the numbers could have been better going this route over that route?  Or what if you could have structured it differently to get more money back? (more on that in a moment).  Get prequalified every time.

Now, let's analyze the numbers here.

Property #1

For the first property, if we do want to go the conventional route we do have the option of writing a loan right now.

With a conventional loan you can take cash out right away if you purchased the property with cash but you will be limited to one of two amounts:

- 75% of the ARV...OR....

- Your purchase price + closing costs.....WHICHEVER IS LOWER

So in this case, if the ARV = $220k, $220k x 75% = $165,000

Your purchase price = $143,000 (+closing costs) <-- This is the amount you can get right now, no waiting the 6 months.  This is the LOWER of the two amounts.  

However, waiting a few more months would give me $20k more....so it still might be worth waiting, but that's the choice you have right now.

Now, could you have structured this transaction differently?  Yes, and you could have gotten even more than 75% back out too.  Read this post I wrote on this strategy HERE.

Property #2
Property #2 just has a 6 months waiting period.  Conventional rules are that you cannot take cash out of a property in the first 6 months if you purchased that property with a loan.

Could you have structured that loan differently?  Yes, but you are still going to leave money in that property (which might be ok for you to do) but one of the main reasons we use hard money is so that we can wrap our rehab into the loan itself.  The benefit to us is that we don't have to wait to refinance and we come out of pocket less.  Here's what I mean...

Most hard money lenders will lend you 75% of the ARV. 75% of $390k = $292,500. That means you still would have come out of pocket $50k or so (with closing costs) but you can refinance right away out of that hard money. So even though you have a choice of using your own cash to rehab...the choice should be to roll as much rehab into the loan as possible. That way, you aren't using your own money. You can refinance with a conventional loan right away and be on your way.

Again, ALL of this might be avoided with the portfolio/commercial route but if I have the choice of going conventional that usually the method I want to try for since the loan is usually better.

I hope all of this makes sense but feel free to tag me with that @ if you have any other questions.  Thanks!