@Caleb Scott
This is a very loaded question. Let me use your example and point out a few key things that lenders consider when sizing a deal up.
$40,000 Purchase Price
$20,000 Rehab Budget
$100,000 ARV
The initial terms are going to depend on your credit, experience, and liquidity. So let's assume you have 700 mid-FICO, are a first time flipper, and enough liquidity to get going.
Most lenders are going to do 80-85LTC (loan to cost). That means your total cost is $60,000. Let's use 80LTC for this example.
80% of your total cost is $48,000.
Each lender will use a second ratio, usually 65-70LTV (loan to value), let's use 70LTV for this example.
70% of the your total value is $70,000, meaning you cannot exceed this loan amount. That doesn't mean this is what will be lent.
Since your property is so low in value to begin with, you will run into property value minimums. A year ago, getting loans for $50k properties wasn't so tough, today, it is a different market and many lenders simply aren't lending on property values this low anymore. Some HML may do it, but the costs get pretty high for such a low loan amount.
Expect to have to put down 20-25% of the purchase price on this one. So $8,000 at 20%, then another 5% in Hold Back. That's a total of $12,000 in "down payment". Then you will have to add the lender's points, underwriting fees, title costs, etc... You could easily be looking at a total of $10k-$15k in total closing costs on a deal this size.
So now, you have $18k in and you spent your first $10k in rehab. You can request a draw from the lender to "reimburse" your expenses. Usually there is an onsite inspection or photos or invoices, etc... to prove the work you've done, then they will wire yo funds to replenish your cash. The draw then gets added to your loan amount. To catch up, now you've already borrowed $32,000, now add another $10k, so we are at $42k.
You spend another $10k and finish up the work. You get another draw, and your total loan is now at $52,000. Yay! Congrats!
Now you get your place leased up and begin to refinance. The appraisal is at $100k. The lender will do up to 70LTV of the current value so you can get a $70,000 loan to cover your current loan and recover your costs. More loan fees are taken from that $70,000.
$70,000 - $52,000 = $18,000 Gross Proceeds
$18,000 - $10,000 (loan fees) = $8,000 Net Proceeds
This scenario would not be enough Net to recover your initial investment.
Ideally, your ARV has enough value add to yield a lower LTV from the start. This helps ensure you are getting enough value from your improvements to not only cover your HML but also recoup your initial investment costs and put some more funds back in your pocket than you began with. If your ARV on this deal was $125,000 or so, you would have a very different outcome!
Another key here is that the numbers you play with are all guestimates. The lender will order and appraisal that will determine the current value as is and the ARV. Those are the final numbers that will be used to determine your loan ratios and what the lender will lend to you.
Some food for thought.
Cheers!
