Pros/cons of a conventional loan to buy a flip?

4 Replies

After buying a few properties with my own money and no financing I have only been able to go after the little fish 30-50K range homes. Looking into getting an investor loan through my bank and take the money that I have built up to go after ones in the 60-90K range. The way I see it, if the bank is giving me another mortgage on an investment property for 45K I would just make up the difference in my own money and use the rest for rehab. Example a home for 75K I would have to put in 35K of my own money leaving me roughly 30K for repairs. Since this would be something new to me I am not quite sure of the pros and cons to this. I already have a mortgage from the bank on my rental property that I bought last year. So I was figuring perhaps I could do the same with buying a home to fix up. Grant it, it would have to appraise, but the homes in the upper range are mostly cosmetic fixes and updating for a quick turn around. Any ideas or suggestions? Would this be a good route to go?

Sounds like you have a track record even though its with "little fish". I'd suggest you start talking to folks at your nearest REIA, let them know what you've been doing (put together a deal book even of your past deals), and find some folks who would like to fund your purchase and flip for either a fixed return (interest only short term loans at 8-14%) or a share of the profits or both. A Hard Money lender can help here also, but you will pay 3-4% in up front fees typically in addition to 12-14% interest while you hold the loan.

Conventional financing is great for properties that require little or no rehab and you intend to hold them. Hard money is expensive but can get you into deals with less down and can sometimes cover much of the rehab (most will loan up to 75% of ARV). Private loans can work like hard money but you can negotiate better terms (lower rates, longer terms, low or no fees, sometimes no payments until the end).

Be careful with conventional loans as they often have a 6 month time "hold" time period requirements. 

Originally posted by @Chris Sciolino:

After buying a few properties with my own money and no financing I have only been able to go after the little fish 30-50K range homes. Looking into getting an investor loan through my bank and take the money that I have built up to go after ones in the 60-90K range. The way I see it, if the bank is giving me another mortgage on an investment property for 45K I would just make up the difference in my own money and use the rest for rehab. Example a home for 75K I would have to put in 35K of my own money leaving me roughly 30K for repairs. Since this would be something new to me I am not quite sure of the pros and cons to this. I already have a mortgage from the bank on my rental property that I bought last year. So I was figuring perhaps I could do the same with buying a home to fix up. Grant it, it would have to appraise, but the homes in the upper range are mostly cosmetic fixes and updating for a quick turn around. Any ideas or suggestions? Would this be a good route to go?

 Yeah its not that they require 6 months technically but a conventional lender like myself would get charged back their commission if you payoff your loan in under the min required period. This period is different for each investor who purchases the mortgage on the secondary market.

I always make a disclosure to the borrower they cannot pay it off in under 6 months but technically there is no contract that says you cannot its just more of a consideration move.

If the lender spent a lot of time with you and they get "charged back," they probably arent willing to be as helpful next time....

Thanks everybody for the replies. I will have to check about that 6 month hold on a conventional loan and see what they say and look into that charge back that you were talking about Albert. I know when I bought my town house to rent I was told I can pay the loan off early if I wanted. I am sure they would not want it paid off early because they will lose that interest.

@Doug McLeod

I have a little track record, 1 buy and hold and 3 sold so far. I would love to attend a REI group, however there are none in this area. As far as a hard money loan, not really interested in that. The fees associated with it are just a little high and not worth the risk to me. I have been going at all this on my own so I am not really sure about doing a hard money or private loan. I am still new at this and still learning and unsure about a lot of things, especially when it comes to the financial parts.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.