Conventional Rehab Loans

7 Replies

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

@Richard Xiong

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?

@Richard Xiong

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

MPP=77k

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

How about experiences with Conventional Rehab Loan process? Anyone have any input?

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