First Investment/ Flip - Loan to Purchase Process

[Joseph Taylor]

Hey Community!

I am looking at buying my first investment property. The property is in San Diego, CA. I am wondering if you can help me figure out the process of my first flip.

I’m a licensed general contractor so I have a very good grasp of what the construction/rehab process will be like as I have been the contractor for 75+ Flips.

There are two main questions I have with the process. Both questions revolve around the way that my money and loans will work. I will purchase this property using hard-money. I plan to keep and live this property.

First Question- Who and how do I use to con vert my hard-money loan to a mortgage? Which bank or institution can help me with this?

Second Question- How can I get at least my down payment back out of the deal?

Here’s the scenario:

Purchase Price:$520,000

Out of Pocket= Down Payment-18% ($94,000) / Closing Cost/Fees-$110,000

Construction Loan-$60,0000

Total Loan Amount-$468,000

@ 11% Interest= $4455 Monthly Payments

Estimated ARV-$675,000

Please let me know if all of this looks correct and how I can go about getting at least my $110,000 back out of the deal when converting to a 30 year mortgage.

Also, any advice would be greatly appreciated!

Thanks so much in advance!

Joseph

[Dan H.]

I do brrrr in San Diego.  

It is my opinion that without appreciation this is unlikely to recover your full initial investment without an assist from appreciation. The refi LTV typically will be cappped at 80% LTV and you likely will find better terms at 75% LTV.

ARV: $675k

Loan at $675k ARV at 80% LTV is $540k

$520k purchase + $60k rehab + $16k closing cost and fees = $596k  

Not recovered $46k.

I have gotten lucky and every BRRRR I have done has gotten an assist from appreciation but they have all been done since 2012. The era from 2012 to 2022 was incredible for RE investing.

I have not purchased RE since Dec 2021 (purchased $4m that month).   The reason is not that I cannot find decent rehab projects that could make nice flips.   It is because at the current rates they all bleed cash after the refinance.   Have you run rental numbers using a 50% expense ratio?  50% expense ratio is fairly accurate in San Diego at purchase if using a PM and hiring out the maintenance and cap ex items.   The property tax at a 50% rent ratio (investors should do better than this ratio) ends up being about 20% of the rent. That leaves 30% for PM, vacancy, maintenance/cap ex, miscellaneous   You can see that 50% will end up being a good rough estimate.

Make sure you run your numbers post refi. I suspect you will find at high LTV the brrrr will be large cash flow negative. It is because the rates have doubled since my last purchases

These rehab efforts may make better flips than brrrrr.  We do not do flips but if we did I can find properties that have decent value adds.

good luck