Please help me understand - HML

[Mike Setai]

Hey guys I have a n00b question when it comes to HML. I'm trying to see the value/if it makes sense for me.

My typical deal is usually all cash for the purchase + reno. Currently here is a deal I’m looking at (conservative numbers + time):

PP: $235k

Reno: $275k

Total: $510k

ARV: $675

HML with 20% down and 8 month time frame, 12% annual, 3 points, 3% broker fee, I'm getting:

Total project cost: $602,153

Net profit: $72,847 (not sure why this doesn’t match number below)

Upfront cost: $66,405

But what is quite deceiving is the upfront cost. While it says $66,405 that only includes the down payment 20% + origination + title insurance + property insurance...I think. I 

What is does not take into consideration is the total interest $37,040. My understanding is this amount has to be put into escrow so technically it is my upfront cost. Which puts me at $66,405 + $37,040 = $103,445

Now if the property sells for $675,000 does it look like this?

Selling price: $675,000

Loan amount: -$463,000 — check to HML

“Upfront” cost: -$103,445 — check back to myself

Broker: -$20,250 — check to broker 

Transaction Taxes: -$15,548 — check to town

= $72,757 — also check to myself

$72,757/$103,445 = 70.33% ROI

Am I looking at this correctly? Please correct me if I’m wrong. Appreciate the input, thanks!!

[Christopher Phillips]

@Mike Setai

Usually: 65%-70% ARV. 4-6 points up front, which will include the closing costs. 12%+ interest rate. Interest only monthly payments. 6 month balloon.

If your ARV is $675. you would get 70% of that or $472.5. $235 PP plus $237.5 reno. That leaves you short on the reno $ by $37.5.

So, 6 points up fron $28.35 + $37.5 reno shortgage = $65.85 up front.

6 months of interest at 12% rate would be $28.35

$675 - $472.5 = $202.5 gross proceeds.

Less closing costs 8% (6% broker, lawyer, fees, transfer taxes) $54 Less up fronts $65.85 and interest $28.35 = $148.2

Net profit = $54.3 

You'll also have to worry about carrying costs for property taxes and insurance and utilities.