How much money do I need?

Question

Hi everyone,

So here is the situation. I have a HML that is willing to loan 100% of everything (purchase, rehab, closing costs, points, interest) up to 70% LTV based on ARV.

My question is, working with homes with ARV in the 120-150 ARV range, if I can find a property where the total costs will fall within 70% of ARV so the lender will essential lend 100% of everything, how much money should I come in with to cover things like initial rehab expenses (loan works on a draw) and anything else that may come up that needs cash.

Thanks for your help,

Lance

Jon Holdman · Answer

If you can find a property where purchase, rehab, closing costs and points are all under the 70% the HML's willing to lend, then your additional costs would include the pre-closing items (insurance, inspections, dewinterization fees, utility charges) and your holding costs (utilities, interest payments). You want to watch out for a situation where you end up having to make a tax payment. You'll have credits (typically) when you buy, and debits (typically) when you sell. But be sure you understand the payment schedules. The other big item is the repairs. Very difficult to make any general statements. Some contractors are going to want to be paid in increments, some will take pretty significant payments after the work is complete. Some will want to be paid on the spot once the work is done. Some will bill you and give you a little time to pay. If you have one guy who's doing a big chunk of the work, negotiate the payments so he does the work, you get it inspected and get your draw then you make payments. Won't be possible for everything, but a few big ones might make it possible to keep the amount of your cash needed to a minimum. Since you're not trying to refi, you can also try credit cards. Home Depot, for example, sometimes offers 10% off when you open an account. Or, you might be able to use a pre-approved credit card offer. You'll need to be disciplined to pay this off, but it can provide some buffer. A bunch of stuff comes at the sale. All the commissions and closing costs. You might also see if the HML would let you defer some or all of the payments to the sale closing. You might also try getting the contractors to accept part of their payments out of closing, in exchange for a higher payment.

Brian Levredge · Answer

You'll need to come up with earnest money deposit and appraisal costs initially, which could run several grand between them (depending on how much the seller wants) or more. You'll also need to know how what your total holding period will be which should include rehab time, days on market, and escrow. You'll have to make the mortgage payments during this time and I would add a few extra months to be safe. If you are doing the work yourself and will be on a draw schedule, I would have 50% of your estimated rehab budget on hand. That way you can keep the job moving while you are waiting for your inspections and checks.

Reggie Ransom · Answer

Who is your hard money lender, Lanceh? My wife and I have been looking for one for a while now.

Lance H. · Answer

Wow, thank you both for all the great info. That definitely gives me a better idea of what I will need. A lot of things need to come together for it to work, but I think it can be done with my cash (and possibly a few cc's). Main thing is I find a strong enough deal to support all of the costs under the 70% ltv mark. I have my work cut out for me! Thanks

Lance H. · Answer

Also, I would be planning to resell this. I have written a pretty detailed business plan and sticking to that I need a little more operating capital before I start holding properties. Thanks again.

Lance H. · Answer

As for the draw schedule, when getting the loan they want to have the contractors estimate and I then can request a draw up to once a week based on what items of the estimate have been completed. I don't currently have a property so no rehab budget, but if I can help it I'm not planning on getting into to major of a rehab, probebly 20-30k on a ARV of 120-150k. These tend to be the typical property here. I'm trying to figure out the balloon term still. The lender generally offers 6 months, but I'm going to try to work it out for a twelve month period if possible. Thanks again guys for your help its much appreciated. I can come up with about 12-15k on my own and I would prefer not to bring in a partner, just not sure if it's possible.

Brian Levredge · Answer

Sorry. My response wasn't as coherent as I thought after re reading. That's what happens when you've got insomnia, I guess. Anyway, your cash on hand for construction really depends on how the funds are issued by the lender, as Jon pointed out. Furthermore, your total rehab budget will go a long way in determining that as well as the overall loan size. If your doing mostly cosmetic stuff I can't imagine there will be any draw schedule. One thing I didn't mention is to make sure you have the right term built into your HML for your exit strategy. If you are rehabbing and flipping these you probably want to make sure you have a 12 month balloon on the repayment as opposed to a six month which is a typical balloon term. A shorter term will result in you having to pay more fees to extend the loan.

Lance H. · Answer

Thanks for the response, that definitely gives me a better idea of what to expect. I would be planning to hire a gc for the project, would 50% of rehab budget still be enough? Thanks again, Lance

Jon Holdman · Answer

What's the process for doing the rehab draw(s)? Do you have to be 100% complete to get any of the rehab money from the lender? Or, will they release it in chunks? My experience is that you end up spending a large portion of the rehab budget to get the place to look "50% done".