Conventional Loan + Hard money for rehab costs on a flip?

Question

Hello,My wife and I were interested in purchasing a property to flip for some capital. Our goal is to flip 2-3 houses for capital so that we can start BRRRR'ing properties for rent. This way we can do cash offers, cash rehab, then refinance ASAP to do it all again. My question lies with our first one. We are looking at a property to flip and we have about $30k to play with in cash. The property is listed for $100k and has an ARV of about $160k. (Would like to make offer for $70k and settle around 80k) We estimate that we will need $35k for reno. Is it possible to purchase the house with 20% down conventional loan, and then get a HML for the reno money, then put the house on the market for sale once complete? I was talking about this to a friend of mine and he was saying this wasn't possible because you couldn't purchase and sell within 1 year (which I'm not buying because it happens all the time where people buy a home and then get transferred for work and have to sell their home in months). I am looking for validation from someone who has done that before. I feel this is a good way to get started with our REI journey with our limited funds. We have skin in the game as it's "our house" in the eyes of the Hard Money Lender and plan to be able to flip it within 3 months. Enclosing one wall that has a door to make it a 3/1 and opening the wall between the kitchen and living room to make space for a dining set. Refresh the kitchen with basic cabinets and counters. Repaint and retile the bathroom tub and a new bathroom vanity.Please let me know your thoughts. Thanks!

Tom S. · Answer

@Timothy R Vitale Short answer is no, you can't use both a conventional lender and HML together, because both will want a 1st position mortgage.If you were looking to buy and hold, I've received many purchase + rehab loans through smaller local banks and credit unions, so consider that as an option. However, if flipping, they're not as interested as they make their money on the long term interest.

Tim Vitale · Answer

@Caleb Jordan @Tom S.After doing more research and learning last night, I agree most lenders look at skin in the game, experience, the deal itself and how much cash they're putting out. I am in process of finding an attorney in my area and will connect with them once completed to see if they have any local connections for HML. I'd love to be able to present the deal in person and be professional and explain my goals, my analysis, my skin in the game aspect, and my "outs".

Caleb Jordan · Answer

Some HML look at credit others do not. Biggest factors for rate are experience, ltv, perhaps credit. Some HML offer a variety of loan options like Lower LTV or LTC loans at lower rate then the highest rate applies to highest ltv or ltc loansOthers have very different rates for a first time flip vs the 20th time flip. The difference in rates you see is probably from these factors.

Tom S. · Answer

@Timothy R Vitale I can't tell where you're from, but typically calling around to local HML's or attending a REI meetup group in your area to get recommendations is best. Certainly you can call around to the HML's on this site. Maybe others can chime in if certain ones are better than others.I would actually be surprised at a 7.5% rate unless you're in a really competitive area (like CA). When I've called some in the past, they really didn't base the rate off credit score. They told me it's a mix of the deal itself, experience, down payment, cash reserves, and pulled credit to check for any foreclosures / judgments / liens. They especially stressed cash reserves, because they stated last thing they want is to take back an unfinished project because the borrowers ran out of money.Hope that helps and good luck!

Tim Vitale · Answer

@Tom S. Thanks Tom. Makes sense as if I were a lender I'd want the same and did not consider that factor. This is not an area where I want to hold long term, just in and out to build equity to start buying in better neighborhoods for long term holds. I suppose I will have to go with the HML for the whole deal. I see there are a lot of recommendations on the BP website for HML, however has anyone ever used one of these before or could recommend a different HML? The ones I see all seem to have variable rate from 7.5 - 12% interest. I'm starting to think that's industry standard dependent on credit score.

Tim Vitale · Answer

@Jaysen Medhurst Thank you for the agreement. I knew I was in the right in saying so. We have considered a HML for the entirety, but are worried about the carrying costs. If we financed 90% of purchase and rehab with HML at 10% interest (and unknown amount of points paid at origination) we would be spending a LOT of money monthly in order to do the deal. My idea was, and I could be swayed, that if we did it this way we could save the $1,300 a month or so in HML interest only payments by financing a significant amount less. I suppose I would have to run the numbers both ways but I really don't have an accurate estimation of closing costs to purchase, plus closing costs to sell. Combined my wife and I make really good money, and we now have minimal debt (my student loans, mortgage, and her car) but adding $1,300 a month to those revolving debt payments for 6 months or so could really hurt us big time.

Jaysen Medhurst · Answer

@Timothy R Vitale, "can't purchase and sell within 1 year?" Um...no, that's wrong.Why not use a HML for the whole thing? You'll be able to close much faster, save money on closing costs, and not run the risk of the bank getting cold feet. You will pay higher interest rates, but if you can price the property right and turn it quickly, they will be largely offset by the savings of the closing costs.