Need ideas - can't afford hard money loan

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Need ideas - can't afford hard money loan

Jonathon Buder
Midwest City, OK · Member since 2010 · 10 posts · 0 votes

Good morning/afternoon everyone.

I have found a property that seems to be a great deal with a lot of potential, but it's by all means a fixer.

The price it's listed for it $250,000. It just got listed yesterday. The estimate from Zillow is $507k, Eppraisal is $530k.

It's a once-high-end house on a big lot with mature trees, bushes, lots of privacy, etc. The pool is full of algae, the inside is full of junk, the carpets and possibly floorboards are ruined because there's a hole in the roof and it's been raining for the last week. The location is wonderful and the median home price is $520k.

I would like to take on the project. Unfortunately, at first glance when I looked at a hard money lender's terms, at 1 year interest-only at 12.5% APR, the payments would be $2604 per month.
Please tell me if I'm doing it wrong ((250,000 * 0.125) / 12)).

I would assume that the after-repairs value would be right around the median price for the neighborhood ($520k), but my intention is to live in it once it's habitable and then rent it out if I have to be an owner-occupant to get better terms on a deal I find in a year or two.

I'm going to have a professional handyman friend of mine go back with me to take a look and get a rough idea of the cost and timeframe to do the repairs.

So my question is this - How can I go about financing $250,000 for a fairly short period of time, during the repairs, and defer the payments or amortize the total amount to be paid over a longer time period?

My first thought was to get a longer-term loan, say 3 or 4 years, for the amount of maybe 6 months' HML payments at $2600/month. This would be manageable and I could pay it off early after I refinanced the property after repairs for a 30-year term.

Then again, long-term financing of a short-term loan sounds dangerous and almost as bad as financing a 'down payment'.

Please share any thoughts you might have. I have a few possible local contacts for a private financing agreement too...

An added complication is that my income is currently $1900/month net, with no housing payments, and in a couple months it will be $3850 but I'll have to move out of the free government quarters.

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y

As a HML there is no way I would do this loan.

First, you don't even know the real value. You're speculating, based on median prices and zillow. You need real comps and real evaluation rather than a guess.

Second, you want to live in it. Hard money makes sense for investments. If it doesn't work out, you walk away quietly and painlessly. I will (and have) take your property if you don't make the payments. We're not doing any modifications, workouts, deferrals or anything like that. When you're wanting to live in it, you get emotionally involved. Its no longer me taking your bad investment, its me taking away your home.

This house sounds like its trashed and needs roof work and repairs from the roof problems. This sounds like $50K in work to me. You'll have closing costs, too, and I suspect there are several points on that loan. That sounds like you need about a $320K loan to cover the purchase, fixup, points, and closing costs. The IO payments on that are $3,333 a month.

I guarantee you will need to hold it at least six months to do a refi and a year isn't out of the question. That's $20K in interest for six month, $40K for a year. The refi isn't free, either, so I think you're looking at a $350K loan, at best. You certainly don't qualify for that with your current income and its marginal with your higher income. At $350K and 4%, your payment is $1671 and a lender is going to want to see gross income around $6000 a month. The lack of income history is going to be a problem, too. The lender is also going to want to see some cash in the bank.

A HML is going to want to see some cash into the deal, too.

If you want to rent this, even with the 4%-ish OO financing, you need something like $3300 a month in rent. Is that possible?

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  • Stephen McKee
    Specialist · Riverside, CA · Member since 2008 · 382 posts · 72 votes
    15y

    You can get hard money that defers interest for 6 months. That's not very difficult to find in Socal. You should be able to borrow up to 312K (60%) LTV assuming your value is correct. Repair money will likely be given on a draw bases to a licensed contractor

    My concern is that you want to keep and rent this property. After the property is repaired you'll need to get a 30 year fixed non owner occupied loan. The loan will likely be around 320k after all expenses, repairs, deferred interest, etc are paid. PITI that's a payment of roughly $2,250 @ 5.5%.You'd need to rent it for about $3,000 a month for it to make sense. I don't specialize in San Diego but I'm almost certain that's going to be high.

    Also, your debt to income ratio is with your future income will only allow you a loan around 280k-300k. You may not qualify to keep it.

    If you do decide to buy this property I'd suggest flipping it. Your looking at roughly $35,000 in total sales cost and commissions. If 520k is the actual flip value and your 320k into this project you should have a healthy profit. 520k - 35k = 485 -320k = 165k. That's a 50% return. This would be a highly lucrative deal.

    But...Zillow is worthless and I'd have an agent check it out for you. Call Joel Lee in SD @ [PHONE NUMBER REMOVED] if you need some free professional advice and be sure you tell him I told you to call.

    2Reply
  • Jonathon Buder
    OP
    Midwest City, OK · Member since 2010 · 10 posts · 0 votes
    15y

    Thank you for the reply Stephen.

    Your point makes sense about the mortgage amount and the necessary rent amount. This one might not really fit into my game plan of buy-hold-rent. Still, I will do more homework and see if it's viable to flip it later on.

    Just curious, you mentioned it would probably be a non owner-occupied loan. Is that generally the case when refinancing something bought with hard money? I was talking to a lender who specializes in VA loans and bounced this off of him; he thought it would be feasible to refinance with an owner occupied VA mortgage if their inspection and appraisal was favorable.

    I will get in touch with Joel and mention your name, thanks for the referral.

    0Reply
  • Marc Freislinger
    Flipper · Phoenix, AZ · Member since 2009 · 973 posts · 679 votes
    15y

    Nevermind

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    As a HML there is no way I would do this loan.

    First, you don't even know the real value. You're speculating, based on median prices and zillow. You need real comps and real evaluation rather than a guess.

    Second, you want to live in it. Hard money makes sense for investments. If it doesn't work out, you walk away quietly and painlessly. I will (and have) take your property if you don't make the payments. We're not doing any modifications, workouts, deferrals or anything like that. When you're wanting to live in it, you get emotionally involved. Its no longer me taking your bad investment, its me taking away your home.

    This house sounds like its trashed and needs roof work and repairs from the roof problems. This sounds like $50K in work to me. You'll have closing costs, too, and I suspect there are several points on that loan. That sounds like you need about a $320K loan to cover the purchase, fixup, points, and closing costs. The IO payments on that are $3,333 a month.

    I guarantee you will need to hold it at least six months to do a refi and a year isn't out of the question. That's $20K in interest for six month, $40K for a year. The refi isn't free, either, so I think you're looking at a $350K loan, at best. You certainly don't qualify for that with your current income and its marginal with your higher income. At $350K and 4%, your payment is $1671 and a lender is going to want to see gross income around $6000 a month. The lack of income history is going to be a problem, too. The lender is also going to want to see some cash in the bank.

    A HML is going to want to see some cash into the deal, too.

    If you want to rent this, even with the 4%-ish OO financing, you need something like $3300 a month in rent. Is that possible?

    5Reply
  • Jonathon Buder
    OP
    Midwest City, OK · Member since 2010 · 10 posts · 0 votes
    15y

    Ouch. Jon, thanks for shedding more light on the reality of this one. It saves me from blowing money or time on a what is looking more like a losing proposition.

    Looks like I'll have to start much smaller and have a stable place to call home and a lot more money in the bank before I can look for another one like this.

    For the heck of it, here's the link to the page on the property.
    http://www.redfin.com/CA/Spring-Valley/4304-Avenida-Gregory-91977/home/5632000

    0Reply
  • CJ L.
    Rehabber · Denver, CO · Member since 2010 · 79 posts · 20 votes
    15y

    I looked at the link and it looks like a nice property and depending on the numbers could be a decent deal.Jon is right on this one and gave you advice from the HML's prespective.

    The biggest problem with the deal is that you plan on living in the property which pretty much defeats the purpose to almost all of us here. As strictly a flip you might have a good deal depending on the actual comps, rehab costs, ect... but then that means you sell the property to someone else to live in which you don't want because you want the house yourself.

    So either do the homework and see if it's a good deal to flip and try to make some money or look around some more for a home for yourself. Good Luck

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    If the value is what you think, around $500K, this may well be a money maker. It just sounds like its out of your league for a fix and flip, and out of your budget for a residence. According to rentometer (which I find to be on the high side), rent for a 3BR at that address would be $1700. Even vs. the $250K purchase price, that a terrible rental.

    Residences are nothing more than expensive doo-dads, just like cars and boats. There's a whole industry that trys to convince people a residence is an investment by looking just at the value of a house over time. And, indeed, if you're totally unable to save any money, buying and paying off a house is a nice forced savings plan. But the reality is that once you include the interest costs, insurance, maintenance, and the inevitable upgrades we all do to our residences the amount you end up with in property value after paying off a 30 year note is almost always less than you're pumped into the property.

    The number one thing you can do to build wealth is to spend less than you make. Part of that is avoiding buying a residence that's too expensive for your budget and trying to justify it as an "investment."

    Just my opinion.

    2Reply
  • Jonathon Buder
    OP
    Midwest City, OK · Member since 2010 · 10 posts · 0 votes
    15y

    Thanks again.

    I understand what you mean about the TCO of a residence and living within your means.

    I'm trying to find the best possible first property to buy which will also be a good building block to investing in real estate.

    I started out by looking at the purchase price and trying to find the very cheapest detached SFH's in this area. That would lead me to something much cheaper than $250,000, but it'd be in a part of town in which I wouldn't feel like taking a stroll through the neighborhood after dark and wouldn't want to raise kids in or be proud to have people come visit.

    Then I started looking at price per square foot as a factor, and considering the possibility of renting out some of the bedrooms (to friends or co-workers I trust) to pay for some or most of the mortgage payment. I mean, that's not an ideal situation forever, but it might be neccesary for now.

    That's what got me looking at properties in that price range.
    This other one was my top choice based on the price/sq. ft. and bedrooms, and it doesn't look or sound like it needs much work. I think when it came time to move out, I could rent the whole house for about $2300, and the mortgage payment would be somewhere around $1500.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    If you can rent a $500K house for $1700 a month, you should rent. The owner of that house is taking a bath and subsidizing your living. When you borrow many you're paying rent on it in the form of interest.

    Keep your investing and your living separate. The most profitable rentals are often in the lower priced areas that may not be where you would prefer to live.

    Read about the "50% rule" in the Rental Property forum. That's where I came up with the statement you need at least $3300 in rent if your P&I is $1671. If you're looking at houses that rent for $1700, you can only afford to pay something like $150K and even then you're just break even.

    In your possible house your P&I at OO rates is $1671. You have to add taxes and insurance on top of that, along with ongoing maintenance. Realistically, that house is going to cost you something like $2200 a month to own. That's what I mean by the owner of a house like that which rents for $1700 is subsidizing the tenant. You are giving up the possibility for appreciation.

    1Reply
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