Conventional Rehab Loans

[Richard Xiong]

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

[Patrice Penda]

@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