What's the best way to fund this cash deal?

Question

Hey Folks!

I'm zeroing in on a deal and I need some advice on the funding. The MF I'm looking to purchase is looking for $150k cash purchase, you can probably guess I do not have $150k sitting around. I'd estimate the ARV would be about $190-200k. I'd still offer slightly lower, but here is my financial situation:

-Currently paying $1600/mo on my personal home

-I have $12k in cash, $8k in taxable investment accounts I can liquidate, I also have ~$30k in an Roth IRA. If the deal is worth it I could withdraw from my IRA.

At this point I think I'd have to get a hard money loan and definitely have skin in the game to get the loan. What makes sense here and how should I do it? Let's say I have an accepted offer of $140k, to be able to refinance to a 30yr mortgage, I'd need at least 20% down, $28k. Let's call it $35k for down payment and closing costs. I'd need a loan of about $140k for purchase and repairs.

So, how do I work this? Do I start with a hard money lender and then the bank? Do I start with the hard money with 20% skin in the game and then ask for the full $140k to cover all purchase and repairs, make the repairs, get an appraisal, THEN get a conventional loan to get out from under the hard money loan? How much extra/emergency money will the bank want me to have available to carry these two mortgages? Or, do I keep waiting and saving up money till I can better handle the load?

I appreciate any feedback. I don't want to be another person who gives up and never gets started...

Ann Bellamy · Answer

Thanks, @James E. for the shout out.  I can answer some of Matt's questions now.

HML - You have a challenge here:  If you are looking for hard money to purchase with the goal of refinancing, you will (frequently) need to show that you can refinance.  That means you start with the end financing and find out if and how you will qualify once the building is repaired AND leased up.  Bear in mind that conventional lenders allow you to use part of the income from the building to qualify for the mortgage.

The challenge with many HMLs is that we require you to take title in an entity.  Once you own it in an entity, conventional residential financing (which I assume you refer to because you said 30 year) won't work.  Because they won't lend to entities, only to people.

You can look for commercial end financing, (the commercial department in a bank, not the mortgage department, and they won't do 30 year financing) or you can look for a Hard Money Lender who will lend to you with title in your own name.  They do exist, I know one.  But I am not that one.  I can send you to them, however.

So you have the common question of buying properties in your own name or taking title in an entity.  That question has been covered ad nauseum on BP, so do some searches

Networking for funding:  It is very common for real estate investors to find people with money at REI meetings.  However, they do it one person at a time, building a relationship FIRST!  Many REI groups will not allow you to introduce yourself saying you are looking for partners or investors or Joint Ventures.  Black Diamond is one of them. Why?  Because public advertising for investors violates SEC rules and can land you in a world of trouble.  So groups prohibit it so they don't get called out by the SEC for allowing it.

I believe the topic of finding private people for investing or partnering has been discussed many times, so I'd do some more searches on BP.

Sorry this answer is long and doesn't give you a magic potion.  It's part of why real estate investing is hard.  You have to keep looking for the right people and connections.  It comes together, but only for those with drive and more importantly, persistence.

James E. · Answer

@Matt Charette a good place to start your networking would be the Black Diamond meetups hosted by @Ann Bellamy - they have a Worcester meetup (and a Waltham one) where you might be able to find some new friends to help you navigate this deal. She also does hard money loans so you may want to speak with her about funding options.

Also if you're interested... we just started a Boston area MFH meetup in Somerville. We had our first meeting last night and there were 15-20ish people there. It was a good time and we will be hosting it monthly. I'll let you know when the next date is and maybe you can make it up!

Sam C. · Answer

How old is the seller? Does he need monthly income? Are the capital gains going to eat a chunk of his profit? Try owner financing with say 20% down, 20 amortization, 6% interest, 5 year balloon. Preferred way for a buyer is doing an actual sale where you get the deed and he gets a mortgage. Some sellers frown against giving up the deed until paid in full but you could set it up as a delayed settlement (You get deed when you pay off loan balance). Best for buy and hold until paid off then sell or cash out. Another option is a hybrid with seller holding a second position mortgage for 25-30%, you come up with 20-25% and find a lender for the remaining 50%. Banks get a 50% position this way so their risk is minimal and can get around some of your lack of funds situation. Best of luck and check out a great app on google playstore to evaluate an investment property; Property Analyzer. It provides great hold and buy data that can be changed to see different results. There's a free version that gives most of the features but it does have ads. Still a great little app and very simple and intuitive to use.

Chris Ellis · Answer

You should do a 12 month bridge loan, include the rehab costs so you can be reimbursed on those expenses. Pay interest only. Fix up. Collect new appraisal. And then refinance if you plan or keeping it. There is not a group that will structure a long term loan off the bat and include rehab costs. If you are looking to include those costs then you need to look towards the bridge option. If you want to do long term, then you need to ditch the rehab costs initially and plan on coming up with those through another financing methods or cash, once you own the property.

Jonathan Orr · Answer

@Matt Charette

A friend of mine is a hard money lender that may suit your needs.  They look at the deal more than personal finances.

If you are interested I am happy to put you guys in touch and see if his platform works for you.

Anthony Palmiotto · Answer

Some HML will be able to give you up to 90% of the purchase price and 100% of construction costs - so long as the total loan amount is at or around 65% of the ARV. In that case you would be able to acquire the property for little cash out of pocket. Most good HML will not have a pre payment penalty so you can refinance as soon as you are able to. Some banks will want a certain amount of time to go by before they use the current value rather than your purchase price. If you look for a local lender, you can likely find someone who will lend to you immediately (or after just a short time) based on the appraised value instead.

Matt Popilek · Answer

Mine concern with this deal is how skinny the profit margin is.  190k x .65 $123,500 should be purchase price before deducting for rehab costs.  If you get this deal at the right price getting hard money should be easy.  Ask for a 12 month loan rather than 6 month.  Once the property is renovated, and rented for 3 months you should be able to get this refi's with almost any lender at 65%-70% LTV as a stabilized cash flowing property.  You could do this deal with the money you have as long as you get the right purchase price.

Matt Charette · Answer

@Ann Bellamy Thanks for your input, much appreciated. It sounds like I should be looking for a pre-approval for the end financing to confirm I can get there with a conventional loan at the end of the day. Looks like I was putting the cart before the horse. All great information. I do need to scrape BP more for existing answers on similar situations and questions.

Great reminder to the community about remaining SEC compliant as well!

Matt Charette · Answer

@James E. I live in Stoughton, but work in Cambridge, so the Somerville meet up would be perfect. Too bad I am a day late. That would be great if you could let me know when the next meet up is scheduled!

Henri Meli · Answer

@Matt Charette Maybe for this deal , it is too late, but there will be more deals in the future, if you stick to this. Therefore, it is important to start building that network of people who can partner with you. One of Joe's suggestion at the Best Ever Conference: Start your own meetup group.

Good luck !!!

What's the best way to fund this cash deal?

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