All Forum Posts by: Anthony Ogletree

Give some details about the house you are looking to deal with.  If there is not a specific deal, then make up a realistic scenario that would encompass your dream deal.  Realistic does not mean the mint condition Ferrari that was found in the barn....it means a deal that is good enough to make it worth your while but not so great that 35 other investors would either find it first or pay more than you. 

How much capital do you have right now? This could be cash in the bank (preferably) or other capital you could easily, quickly and cheaply access (not a HML or traditional loan).

For me...in my area....the ideal house has ARV between $70,000 and $150,000. I am a buy and hold investor. I don't flip. When I buy the house, the most I would be willing to have invested in the deal was 80% ARV and that is if it is in a great location etc. 80% is absolute max for the best of the best. If the house I was looking at had an ARV of $100,000, I would immediately subtract 20% or $20,000 since I invest a max of 80% ARV. Then if it needed $20,000 of work you would subtract $23,000 for work ($20,000 planned + 15% contingency), $4,0000 for closing costs, (1 time to buy and 1 time to refi in 6 months) and subtract the cost of capital prior to refi....lets assume $60,000 HML @ 15% with 3 points. That would be an additional $1800 in points + $4500 in total monthly interest payments for 6 months). In this simplistic example, that would mean I would pay no more than and preferably way less than ($100,000 - $20,000 - $23,000 - $4,000 - $6,300) = $46,7000.

So, with this scenario, you would get it under contract for no more than $46,700, borrow $60,000, leaving you with $13,300 to make $20,000 worth of improvements, cover contingencies etc before you can get it rented.

Once the work has been completed and you have owned it for at least 6 months, you can go get a cash out refi at 75% ltv. So, $75,000 - $60,000 gets rid of the hard money loan and puts $15,000 back in your pocket. The refi lender will want to see reserves to pay insurance and taxes for a year and at least 6 months worth of payments. That should not be hard. Just make sure your DTI and credit score are good. The numbers are simplified somewhat because I showed paying the refi costs and HML points and interest payments earlier in the subtracted values to determine max price to pay. In reality, you pay those amounts at different times in the process but still want to account for them in your calculations.

I am fortunate in that I have better alternatives than HML's so there are likely some details I left out since I have not ever dealt with one. But this should be enough to get you going and whatever HML you decide to work with can fill in the blanks or make corrections as needed. You might even want to find a small local bank that does construction loans. Better rates and options to convert to permanent financing but requires slightly better qualifications than a HML. Depending on how aggressive you want to get, how much debt you currently carry etc, there are options with 0% cash advances on credit cards (maybe an existing card or just open a new one and cash advance to yourself). You could refi your car to get extra cash, borrow against 401k or simply hit up someone you know that is willing to risk some money on you in return for above average interest. A HML is the last resort for me and so far I have been able to avoid them. They are certainly of value, but way too expensive for me.

Good luck.

Is there a way you can get more cash together? Get another job, work extra hours, cut your expenses. I know these are never popular suggestions but the question is how much do you want this. Having money in hand ("skin in the game") is going to get you better rates, help you access more financing options than if you have non, and is going to make you work harder and smarter because we're always more careful about spending our own money. Its just human nature.

Just putting this out there so you look at all possible angles of this.

The cash reserves requirement for long term lenders are hard to get around.

Fix and flipping also often required cash. For example, about the most liberal terms I've seen are that a hard money lender will lend 70% of ARV with four points and monthly interest payments based on a 15% interest rate. Say you can find a deal where purchase plus rehab is right at 70%. In many areas, its tough to find such deals. But say you do, the HML agrees on the numbers and you get the loan. Your loan covers the purchase and rehab costs. But you have those four points (4% of the loan amount) off the top. That's out of pocket for you. And you will have to pay any other up front costs out of pocket - appraisal, title company fees, inspections, insurance, utilities, etc. Then you have the monthly interest payments (1.25% of the loan amount.) You will also have carrying costs, such as utilities. Most HMLs will hold the rehab money in escrow, so you will need cash to pay for labor and materials, then the HML will reimburse you. If you go over budget, that's entirely out of pocket. If, at some point, you run out of cash and can't make the payments or complete the work, the HML will take the property and you'll lose whatever cash you've put into the deal. My rule of thumb would be that for a deal like this you need about 15% of ARV of your own cash.

For a hard money lender, 12 months would be a long loan.  Terms are more typically 6-9 months.

Even with a hard money lender, you usually some cash of your own. It take an exceptionally good deal and a very liberal HML to get into the property with no money of your own. And when you refi, even it the numbers work that you can refi without putting in any cash of you own, you still need cash reserves. Conventional loans require a minimum of six months PITI for the new loan, plus two months for existing properties. If you get past four mortgaged properties, you'll need six months PITI for all properties.

u never said the price of the house. Im fairly new but im into houses around 30k as a small amount are move in ready where i am and that is the mortgage threshold where i am. Call the banks and take notes on their LTV. I think that is important because if the only bank u can get a loan from does a 65% LTV it may not pay the hard money loan off. I guess paying it down would beat a zero though lol. But get the average score u need to obtain the loan and closing fees etc. Also C.unions here combine financial accounts. So if u have a credit card and loan in the same bank, defaulting on one affects the other. That's what i learned in my homework as i need a lot of leverage to invest in buy and hold.