Flip to Rental: Conventional Loan and HELOC

9 Replies

I've found a house (my first investment prospect) that I could flip with good margin. 

The lenders I've talked to said 6 mo or less wouldn't get me a traditional loan and I'd likely have to go with a rehab loan. 

Is that going to costly versus a traditional loan? What's the up or downside compared to a traditional?

I'll need to use equity from my personal residence to assist in financing the purchase. 

If the rehab loan is too costly, I thought I might buy with a traditional loan via cash and a HELOC, fix it and rent it until the 6 mo is up.

Anything I'm missing? 

You are over complicating it.  Contact a hard money lender and get some terms.  You will pay a higher interest rate, and most likely it will be an interest only, but that is a cost of doing business.  A local hard money lender will be your best bet as it will probably not cost you as many points as a national hard money lender.

What's nice about the hard money lender is that they will typically be asset based, and not look at your credit or income. So, that will be good for giving you flexibility to do your HELOC and other things without fear of running into DTI ratio issues, or seasoned funds issues.

@Matthew Kenny congrats on your first lead! Do you mind sharing numbers with us, so we can better understand your deal?

Cheers,

Damir

@Cara Lonsdale Good point! I hadn't thought that because I was so focused on rentals when I first started looking into this. I had my blinders on. 

@Damir Kamber thank you! I've got $8k cash now, 20% equity in my house at ~$16k. The prospective house is listed right around $100k. comps at $150k minimum. Need $15-$20k net profit. I've also looked at starting out with a duplex rental, so I've got options if I can't do the flip. That's if I can't finance it or if the price isn't negotiated to meet my margin.

@Matthew Kenny have you tried using the Fix and Flip Calculator in the Tools section? You are giving yourself a 50K spread and you will probably end up using a hard money lender. They will charge you between 3-5 points since it's your first deal, so your down payment is 3-5K if they are lending you the entire 100K. They will also charge you an interest rate somewhere between 12-15% so you are looking at monthly payments of 1000-1100/mo, plus all the other monthly holding costs like the utilities, etc. So right there you are at 50K - 4K - 4,500 = 41.5K - 9K for the agents when selling, you are at 32.5K. What are you estimating in repairs? 

Just some rough numbers for you, the calculator will give you a better idea if this deal is doable. Always do the numbers and the numbers will tell you what to do. 

Cheers!

Damir  

@Damir Kamber still working on figuring out repair costs. Once I get those, I'll work backwards to get the amount I need to purchase at. Thanks for pointing me to that tool. I'm working on getting all the numbers to plug in. I really just wanted to see the best approach and if it was feasible. It sounds like a hard money loan is the way to go, so that and repair estimates are top priorities. I'll tag you on this thread when I get all the numbers and make the decision. Big thanks to you and the community on BiggerPockets to empower new investors like me. It's invaluable.

@Cara Lonsdale I don't necessarily agree that national lenders are more expensive than local lenders.  I've borrowed from 15 different hard money lenders, 6 have been local.  I've moved away from local lenders.  They charge 12% interest and 2-4 pts for a 6 month loan.

I currently get 8-10% interest and 2-3 pts on a 1-yr loan with national lenders.  And I'm able to leverage up to 95% of cost at times.  Last month, I got 10% and 1 pt with a national lender on an out-of-state property.

The only benefit I see from a local lender is the ability to move faster.  I've had one of them close in 2-3 days.  Most national lenders will want 1-3 weeks because they will have to do a BPO/Appraisal, whereas the local lenders know the area to do their own in-house comps.

Originally posted by @Nghi Le :

@Cara Lonsdale I don't necessarily agree that national lenders are more expensive than local lenders.  I've borrowed from 15 different hard money lenders, 6 have been local.  I've moved away from local lenders.  They charge 12% interest and 2-4 pts for a 6 month loan.

I currently get 8-10% interest and 2-3 pts on a 1-yr loan with national lenders.  And I'm able to leverage up to 95% of cost at times.  Last month, I got 10% and 1 pt with a national lender on an out-of-state property.

The only benefit I see from a local lender is the ability to move faster.  I've had one of them close in 2-3 days.  Most national lenders will want 1-3 weeks because they will have to do a BPO/Appraisal, whereas the local lenders know the area to do their own in-house comps.

 I guess it can matter where you are.  Here in AZ, I have a local hard money lender that can fund in 24 hours at up to 85% LTC, and doesn't charge much in the way of points, AND funded 100% of the rehab.  The national hard money lenders couldn't touch that.

So, I guess it helps to at least shop around.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here