Newbie Investor Financing Question

7 Replies

I know questions like this are addressed all the time. I did my best to piece together various posts before asking, but I'm still not putting together the big picture like I should.  Apologies in advance for beating dead horses.

I am looking to buy and hold my first investment property. I found a foreclosure that looks to be an opportunity for instant equity in addition to a solid cash flow. I need to better understand my financing options before getting too far into the process.


Purchase Price: likely $70,000 - $75,000 (currently in online auction)

Reno Costs: ~$35,000

ARV: $135,000

Right now I can put 20% of the purchase price down with no issues while still maintaining 6 months of PITI reserves. This would still leave me in a spot where I need to finance the reno costs. If I'm going by what many hard money lenders will finance, it seems to max out at 65% ARV. That would be $87,750.

My question has two parts.

1) If I take the lended $87,500 along with my $14,000 (min) I fall short of fully funding the reno.  Am I missing anything?  Do I have any other options to finance the reno?

2) Given that hard money financing is 12%+ interest only, do most long term lenders prefer 6 or 12 months of seasoning before I can refi? Is the expectation to have negative cash flow until it's seasoned? Can I do cash out at the same time as this refi?

I'm new to creative financing, so I appreciate any sage advice from those of you who have done this quite a few times.

Yes, this auction does allow financing. Regarding HML I'm not sure. This specific property is local to me with an MLS listing. The bank listed through Hubzu instead of a foreclosure auction. I don't see anything disqualifying about this property for a HML, but I plead ignorance.

@Daniel Rutherford   Thanks for the response and good to hear the property can be financed.  So to your question:

"1) If I take the lended $87,500 along with my $14,000 (min) I fall short of fully funding the reno. Am I missing anything? Do I have any other options to finance the reno?"

Your best option for the remainder of the renovation costs may be credit cards (assuming you're comfortable with that), and of course friends / family / partner, 401k loan, etc. It doesn't seem like a huge amount you're short. You'll have to get that lined up first though - it's unlikely you'll get an approval until the lender know where the reab funds are coming from.

The last thing any lender wants is for you to run out of funds, and the lender to take back an unfinished property.

Finally on #2 - I'll defer that to the lenders, I can't say what their seasoning requirements might be.

Good luck!

- Tom

Your best option for the remainder of the renovation costs may be credit cards (assuming you're comfortable with that)

 I'll probably avoid the credit card route even though it's only a temporary situation.  Perhaps I can borrow against my variable life insurance policy at a sub-10% rate.  Either way I appreciate the advice.  It may be a creative squeeze.

Are there any other ideas that I may be overlooking?

To any lenders out there, how long am I required to hang onto a HML before refinancing to a conventional mortgage?

@Daniel Rutherford Other options - talk to local banks in your area and the commercial lending department. Ask for purchase + rehab financing, and see if they have options for it to convert to a normal loan at the end of the rehab. This way you don't have to stress about the seasoning and refinancing out of the HML. Plus it should be much cheaper overall.

The only catch, at least in my case, was that the commercial loan still required a personal guarantee - meaning full doc loan (bank statements, tax returns, etc). But it was 5% interest, no points, $2k in closing costs, and only one closing up front. It was an in-house loan so they approved it pretty quickly, about 3 weeks total.

Hope that helps!

- Tom