I’m looking to purchase my first flip in Fresno, Ca with a Conventional Rehab loan. I’ve consulted with an experienced realtor who works with local investors and he suggested using a Conventional Rehab Loan with 20% down.
What are the pros and cons to using this loan strategy?
Below are rough calculations I've done using excel formulas on an actual listing I found in the MLS. Feedback would be greatly appreciated.
List Price $110k
ARV $160k (est area comps)
Max offer $90k on property
Est Rehab $30k
Total Loan $120k (purchase + rehab)
Down Payment $24k based off total loan
Estimated closing costs at 5.5% $6,344 (avg closing costs are 3.5-6%)
Mortgage amortized 30y at fixed 4.6%
Mortgage payment/tax/insurance $639.81
Holding costs for 3 month rehab and 2 month closing $4,937
Net Profit after paying back leveraged Down Payment, loans, and expenses $13.5k
Your margin is very slim. If you slightly go over budget on the rehab or don't achieve the projected ARV, you might find yourself losing money on this flip.
@Patrice Penda thanks for the input. How much room should I give myself? What would you consider a good enough deal? With the information I presented what would be a better deal for me?
Starting from the ARV, you need to apply a margin factor to work out your maximum purchase price (MPP) when accounting for the rehab and holding costs you'll incur.
70% is a good rule of thumb for that safety margin. (It doesn't strictly have to 70% although it is a conservative number)
So, if your ARV=160, your estimated rehab: 30K, your holding costs: Roughly 5k
MPP= (ARV*.07) - Rehab cost - Holding costs
MPP= (160k*0.7) - 30k -5K
That 30% margin is a safety margin to pay for commission at closing (about 5.5% you said in your case), account for things unexpected and make some profit.
So a good enough deal would be a deal where the purchase price is 77k.
With the rehab and everything, you should be all in at about 112k (77k+30k+5k)
if the closing costs are 6.5k.
Your estimated profit would 41.5k =160k-112k-6.5k
That profit should leave you enough room to account for things unexpected; which usually happens
Snapshot and saved! Thanks @Patrice Penda !
How about experiences with Conventional Rehab Loan process? Anyone have any input?
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