First Investment Property - Buy Property w/ Cash. Loan or mortgage after the fact?

Question

Hi all.

Making my first step into the real estate world.  Started an LLC with a best friend and putting a cash offer in on a bank owned property.  Planning a flip of the property with 50k cash buyout + 40k estimate of renovations.

We've considered paying cash for property, obtaining loan for 90k-100k and paying ourselves back first before starting renovations. We have the capital to pay for entire house + renovations with cash as well. We've considered home equity loans, HELOC, even credit card with high limit and 0% interest for many months.

Any direction you recommend?  We've spoke with multiple banks at this point to get a few options.  Main goal is minimizing risk with it being our first property but was able to obtain the house for 40+% less than listing price due to our cash offer and able to close ASAP.

Thanks

Chase Preston · Answer

The sold comps in the area compare to $130-170k. We're looking at 30k/40k profit on the low end.

Ko Kashiwagi · Answer

Hi Chase,

It's ultimately a matter of leverage and risk tolerance, but if you only plan on doing one project at a time for the time being, using cash is probably the safest option. Once you gain more experience and start doing multiple projects and get short on cash, that's where flippers usually start using financing.

Jacob Sherman · Answer

How much is purchase price ? How much renovation ? 40k spread in ARV is a lot . max ARV will be 65%

Jacob Sherman · Answer

How much will the property be worth after it is completed ?

Stacy Raskin · Answer

Some options are paying in cash and pulling the cash out once the property can have an appraisal that will be marked "as is" (so no work needs to be done to the property to make it habitable).

You can also wait (usually a minimum of three months) to use the new appraised value to pull your cash back out.

Other options are a hard money loan for the purchase and rehab.

If you're looking to buy a property that's not move-in ready:

You can get a fix and flip loan for an investment property with up to 90% of the purchase price and 100% of the rehab budget with up to 75% of the ARV. The borrower is coming in with only 10% of the down payment if approved. The number usually varies from 10-20% depending on credit score, property analysis, etc.

Some lenders will work with any level of investor experience, credit scores as low as 660 and can close in as little as 10 days (there are loan options for 640-660 credit scores- they require 20% down).

Another good thing is interest only and 6-24 month loan terms- you can refinance by selling or refinancing to a long term DSCR rental property loan at any time once you complete the rehab.

Once the property is ready you can sell it or if you want to keep the property as a long term investment, you can underwrite the loan based on your income /debt to income (DTI) ratios or you can go the DSCR route where the loan is underwritten based on the actual or market rents from the appraisal.

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.Here's a bit more in detail about how rates are calculated for DSCR loans:1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.I've included an example below to help illustrate this.So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.See example below:DSCR < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Henry Sims · Answer

Chase, if you have the money and are not planning on doing more than one property at a time, I firmly believe in using your own funds to do it. Things are easier and quicker. If you plan on doing multiple projects at one time, use your funds as a downpayment and finance the houses through a lender.

Dave Skow · Answer

@Chase Preston- thanks for the post and outline .  There are many lenders that will not do loans to LLC entities .  The lending sources that will lend to LLcs  will be more likely to  provide a " purchase loan "  to a LLC  as  compared to doing a  cash out  refinance to a LLC .  Therefore - if  you are  definitely planning to use a LLC - I would recommend  leveraging the purchase with the new loan versus  counting on being able to pull  equity out of the new  rental via a new loan to the LLC

Jay Hurst · Answer

seasoning in lending just means a waiting period. It can be to season title, or in your case to season the value. So, if you buy a house for 50k and turn around and want to borrow 100k the next day that is a red flag. Most programs will say you have to wait at least 3 months up to 12 months before you can use the "improved" value to borrow against.

Chase Preston · Answer

Hi Jay,Do you care to go into a little more insight explaining the "seasoning"?

First Investment Property - Buy Property w/ Cash. Loan or mortgage after the fact?

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