Financing REO for rehab/flip

[Jeremy Bloom]

I am very new at Real Estate investing and have some questions. First off I have 7k in savings and I found an REO property listed for 70k. My question is should I save 20% for down pmnt and get a conventional mortgage? Should I get a hard money loan? I am kind of hesitant about a hard money loan because I plan on doing the work myself and I already work a full time job so this wouldn't be a quick flip in 30 days like you see on TV. but would be done in a matter of months. I understand the idea is to flip a house as fast as possible but I also feel by doing the work myself without hiring it out there would be more profit after the house sells.

Thank you very much in advance for your replies.

[Darrell Shepherd]

$7k prob wont be enough cash to do it. Jon is on point, your LTV matters a lot.

Lets run through it as a case study, though.  Hypothetically it's worth $130k, needs $20k and you can get it for $70k.

Your purchase and rehab is $90k which is roughly 70% LTV.

Lets run that through my best lender- They'll loan you 90% of the purchase less the origination of 2.5%, which is $64,750 plus they'll escrow the repairs of $20k.

You'll need about $1k in closing costs, plus prepaid insurance and interest to the end of the month, so lets just use $2k for round numbers.

SO, you'll need $7,250 to close.

Then you'll need to be able to run the job up until the first draw.  They'll only do 3 and the last one has to be 40% (this isnt industry standard, just what this lender does), so lets say the draw schedule is $6k, $6k, $8k.   So you need another $6-10k to run the job, plus your interest payments (using 12% for round numbers, prob where you'd be at on your first one with them- I'd be under 9% on this deal with them) of $950/mo.

If I were running this deal I'd want about $20k going in to feel comfy through it.  Not necessarily with my money, but that'd be what I'd be thinking analyzing the deal.  I like to have some padding so I'm not slowing the job up to get money to pay for things.

Lets look at the exit:

Purchase: $70k

Closing costs: $1k

Repairs: $20k

Holding costs (6mos): $7500

Total in:  $98,500

Sales Price:  $130,000

Less Total in:  $98,500

Les RE Commission/Sale Concessions:  $9,500

NET PROFIT:  $22,000

Hypothetical numbers on the ARV and repairs of course, but the rest of it is pretty realistic.