Ways around 20% down?

Question

Hi all,I'm a newbie investor with one property that is a "land hack". I'm looking for my next deal. I'm interested in BRRRR type homes or homes that need some rehab. I'm finding lots of deals that work and cash flow with 3-5% (maybe even up to 10%) down but the deal falls when I work it with 20% down. I'm OK with making them my primary if need be, but generally the houses in my price range aren't habitable without 20G worth of rehab in most cases. Are there ways around 20% down?

Theresa Harris · Answer

I'll preface it with it has been a long day, but how can it cash flow with 3-5% down (meaning 95-97% mortgage plus mortgage insurance) and not cash flow with 20% down (80% mortgage)?  The mortgage payments should be higher with 95-97% down than with 80% down.  Most places have problems cash flowing with only 5% down, but do better with 20% down.

Jay Hurst · Answer

@Tripp Warren

The first trick is to get ANY kind of perm loan either conventional or DSCR etc (in other words, not a rehab loan) the property must be "habitable".  So, what make a property habitable because my definition would be very different then my wife’s opinion for example.  It means that there would have to flooring in place, operable bathrooms and kitchen, no obvious roof or foundation issues.

It does not have the updated to your liking or even to max market value. The kitchen has not been touched since the 1970’s? That is not an issue to get a loan. It will affect market value of course but would not be an issue of habitability. To be clear this is a bit of a grey area as the appraisal and appraiser will have a lot to do with it. But if there are properties that are not eligible for permanent type financing no matter how much down.

so if you have a house that is not eleigbie for tradional financing you would need arehab loan. These are based on the after repair value and your loan to cost.  So, if you find the right house and the right price you may actually have to have much less then 20% into your deal. For example, we will lend to 95% loan to cost.  So, if you find a house that cost 150k and needs 20k in rehab, your loan to cost is 170k.  IF after you do they work the house would be worth 220k you could borrow 95% loan to cost which is 161,500.  So, you are borrowing 95% of the cost but just 73% of the improved value.

If you have a house that is not eligible for financing you would need a rehab loan. These are based on the after-repair value and your loan to cost.  So, if you find the right house and the right price you may have to have much less then 20% into your deal. For example, we will lend to 95% loan to cost.  So, if you find a house that cost 150k and needs 20k in rehab, your loan to cost is 170k.  IF after you, do they work the house would be worth 220k you could borrow 95% loan to cost which is 161,500.  So, you are borrowing 95% of the cost but just 73% of the improved value.

Jason Taken · Answer

Yes. Bridge loans where you're buying below market value. If the numbers work, downpayment can be adjusted accordingly as long as day 1 LTV for lender makes sense.

Joseph Lalia · Answer

Can you recommend any such lender for South Florida?

Andrew Syrios · Answer

The two main ways would be 1) buying with a homeowner loan, living there for a year and then moving on; i.e. house hacking. And 2) private loans up front, wait for the property to season (usually 6 months to a year with a bank) and then refinance with a bank afterwards at appraised value. You need to get a good deal for that to work

Michelle Casillas · Answer

I work for a Hard Money Lender, so it's been my experience that you must make sure to go with a lender that doe snot do LTC (Loan-to-Cost) as this will not allow for you to not borrow on the ARV. It is usually a 10% to 15% even if its lower than the LTV. However, you should always ask what is the max LTV allowed and keep your expenses below this mount. You could expect to come 0% out of pocket.

Dave Skow · Answer

@Tripp Warren- thanks ...there are rental property purchase loans that allow 15% down  ..there are many programs that  allow less than 20% down if buying it as a primary home

Theresa Harris · Answer

Unless you do hard money which will have a higher interest rate, you're unlikely to get a lender to do 10-15% down on a rental.  Perhaps look for a partner or a much lower price point.

Stephanie P. · Answer

Hard money for the acquisition and rehab would be your way to go.  20% down, but if you're new to the game, but the rehab is paid out in draws once you've completed the rehab.  Then either refinance it after it's stabilized or sell it and do it again.

Ways around 20% down?

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