I am trying to figure out what type of loans people use and recommend for rentals and rehabs.
Rehab numbers: 175k purchase, 75k rehab (mostly for high quality cabinets, granite, appliances, landscaping). 350-370k ARV.
The loan I am leaning toward is hard money- I borrow 85% of the total project costs and pay 4 points on the money borrowed. There are no payments at all for 6 months from the time the home is purchased. After 6 months the interest rate jumps up to 14.9%. There are no origination fees or prepayment penalties. Overall I would borrow 212,500 and pay back 221,000 at the end of the 6 months.
Does this sound like a pretty reasonable deal? Are any of you doing better? Are there any different loans you would recommend?
Obviously a concern would be not selling in 6 months, but I should have plenty of room to lower the price if it gets to that.
What do you mean there is no origination fees. What do you think the four points are? If they are not buying down your rate then they are not true discount points. Howevr if you have an HML that will go to 85% I say you jump on it.
The 4 points would basically be origination points.
Be sure that the ‘no payments’ for 6 months doesn’t actually mean that they just roll the first 6 months into the loan. Can’t actually imagine that the lender doesn’t want interest for those months.
Most hard money lenders can get you in with very little out of your pocket. Usually they work off the after repaired value. Are you having to put down 15% of the purchase price and rehab costs,
I am paying 4 points to get the loan. There are NO PAYMENTS for the first 6 months. At that point payments start on the loan with an interest rate of 14.9 percent.
Although I said there are no origination fees, what I meant was that there are no additional fees aside from the 4 points.
All in all the company will loan me 85% of what I need to buy and repair the property (up to 70% of the ARV).
Example- I buy and repair the property for 250k (212.5 loaned, 37.5 cash). I sell it for 350k 6 months later. I repay 221,000 to the company for letting me borrow 212.5 for 6 months.
You say there are no payments actually out of your pocket but I’m still curious if the interest for that period was calculated into the loan.
I have an idea who you may be using; most hml are set up so no payments need to be made but they still charge interest for those months.
Personally I think you may be coming in a little high on this deals. A good target is coming in at 65-70% arv with nothing additional out of your pocket.
It sounds like the lender would require 15% down even if you were within the 70%.
A possible way to limit your out of pocket would be to find a lender who does 75 or 80% arv but doesn’t cap how much they put towards total project costs.
These do exists in certain markets but I’d need more info to determine if you qualify. Will send an email.
I’m aware of who you are using and you should note:
You will need additional cash reserves to fund the cost of repairs (draws from escrow are done in arrears of the actual work being completed/inspected).
There are several programs that don’t require the inward investment (down payment) required by this HM lender.
There are several programs that allow you to roll in the cost of purchase + repairs + closing costs + mortgage payments.