Financing Ideas - Posted by Aaron

Posted by Michel Payette on March 16, 2001 at 05:33:17:

Thanks! (nt)

Financing Ideas - Posted by Aaron

Posted by Aaron on March 11, 2001 at 19:58:33:

Hi Everyone, I was wondering if any of you have ways for me to finance in future deals that I may have. Although I haven’t found any deals yet. I am still learning as much as I can before I go out and make my first deal.

Here is my situation: I have $2000 to invest.Although

Idon’t know how to obtain financing?Could someone point me in hte right directions on several different ways that I could get financing for rehab properties?

Thanks, Aaron Thompson

Re: Financing Ideas - Posted by Bob (Md)

Posted by Bob (Md) on March 13, 2001 at 12:14:47:

The best source that I know of is to build a relationship with a small bank that does construction financing. The loans work like hard money lending, but at much lower rates. Typically, the bank will want to know you, know that you have experience in the business aspect, know that the deal makes sense, and will usually only loan in their own town or county. They may ask for additional collateral if they don’t know you (e.g., the equity in your home, or your new pickup truck). Sometimes these are called portfolio loans, because the bank will keep the loan in-house (rather than selling the note to investors).

As an example, my small town bank will do construction loans with the following terms:

7.75% interest rate, interest payments only
one year baloon, no pre-payment penalty
1 or 2 points origination fee
will loan up to 75% of after-repair appraisal
escrow funds and release as work progresses (no cash out)

To give you an idea of the difference, a hardmoney loan will have the same general structure, but will cost 3-4 points origination fee, will be 14-18% interest, and will only go 60-65% ARV.

Note that this can be a zero-down deal. If I buy the property such that total costs are less than 75% of after-repair value, the bank will loan all the funds I need at each stage of work.

In real life, you’ll have some money out of pocket, and may need to pay for this-and-that as work progresses. You’ll get those funds back in the releases from escrowed money, based on the lender’s inspection of work performed (and invoices). Your $2k would probably be sufficient.

To give you an idea of the costs involved, assume a property worth $115k that you’re buying for $40k and it’ll cost $20k to rehab. You’re going to ask for $75k. Assume that you’re selling after 6 months, so you’ll have 6 months of interest payments.

On the hardmoney loan, a 4% origination fee would be $3,000, and your monthly 15% interest payment would be $937.50. Total cost of loan would be $8,625.00

On the local bank construction loan, a 2% original fee would be $1,500, and your monthly 7.75% interest payment would be $484.38. Total cost of loan would be $4,406.25. That’s $4200 back in your pocket (or $2100 after your Uncle Sam gets through with you ;-).

Re: Financing Ideas - Posted by terryr

Posted by terryr on March 11, 2001 at 22:51:34:

how about partners or lease options?

Re: Financing Ideas - Posted by Michel Payette

Posted by Michel Payette on March 14, 2001 at 16:45:16:

Does this work for a 4-5 units complex and how much time does it take to go through the paperwork (3-4 weeks like a mortage application) or less time ?

Great Post! This works! - Posted by Eric C

Posted by Eric C on March 13, 2001 at 12:54:50:

Hi Bob -

Great job.

Folks, deals like this (and for much more money) are done in almost every city and town across this country every day. And I’ve been doing these since the late '70s.

Deals like this are the primary reason I use banks rather than hard money loans. Cheaper. Easier. And in some cases,faster.

Of course, I add a twist or two of my own to this formula. I don’t sell the house - I keep it.

Again, good job Bob.


Eric C

Re: Financing Ideas - Posted by Aaron Thompson

Posted by Aaron Thompson on March 13, 2001 at 19:37:16:

What about lease options?

Thanks, Aaron

Re: Financing Ideas - Posted by Bob (Md)

Posted by Bob (Md) on March 15, 2001 at 18:03:06:

The application time can be pretty quick - my bank has a weekly board meeting. You have to get the application in early enough for the loan officer to do the research, and then it goes in front of the board the next Monday. You get an answer Tuesday. Each bank is probably different.

I think that this type of loan will be based primarily on your business experience, and not the actual type of property. Of course, if you’re dealing with multiunit properties, you’d want to base the value on rental income and not on the appraisal price like a single-family home.