Rehab then mortgage

[Tom Reynolds]

We are  purchasing a foreclosure (single family property) with plans to renovate and hold as a rental. This will be a cash deal. My question is, once the project is completed what are the options for obtaining financing/mortgage and getting cash back.? 

[Account Closed]

Hi Tom - In terms of a conventional refinancing, each bank will have its own criteria. The key questions:

• Seasoning requirements - how long do I as an investor have to own a piece a property before a bank will do a refinance? The bank we are looking to work with in the Philly area doesn't have any seasoning requirements. Rather, they would only lend on a rental when it is fully occupied.
• Maximum loan to value (LTV) - How much of the appraised value will the bank be willing to lend up to? Our bank does 65%.
• Term of the loan - How long before the loan has to be paid off? Our bank does 5 years.
• Amortization - What period does the bank use to determine the monthly mortgage payment? Our bank uses a 20 year amortization period. So the mortgage payments are structured in a way where the mortgage would (theoretically) be paid off in 20 years, but in reality, the bank will want the outstanding principal balance paid off on the 60th payment (year 5). This is the structure commonly referred to as a "20 year amortization loan with a 5 year balloon". Most investors look to refinance at that point and get into another similar loan.
• Interest and points - self explanatory. We are currently paying 5.5% fixed and 1 point at closing.

I've heard of others cashing out by selling a % ownership in the property but I've never done this.

I hope this was helpful. Good luck!