Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
13y
A few thoughts:
- A conventional mortgage is generally going to be cheaper than private money or hard money. Conventional loans these days are going to run about 5%, with maybe a point upfront. Portfolio lenders (small banks that lend their own money) are probably closer to 6.5% on shorter-term loans (3-5 years), private money is going to be in the 8-12% range and then hard money can be anywhere from 12-18% with 2-8 points.
- The lending/underwriting standards are going to go the other way though, with conventional loans requiring the most documentation and the best condition of the property and private/hard money requiring the least documentation and condition of the property.
- As everyone has said above, you're not going to be able to get a conventional loan on a property that isn't move-in ready or that has mechanical (HVAC, electrical, plumbing) issues. Even a broken hot water heater or missing oven can make it difficult to get a conventional or FHA loan.
- If you're not planning to live in the property, I'm a big fan of portfolio loans if you can find them (e.g., for an investment). You pay just a little bit more, but they are generally much more flexible on property condition and their underwriting standards are a *bit* more lenient.
- You mentioned living in the property for a year. If you can commit to a year, an FHA loan is a great way to get into a property VERY inexpensively, but again, you have the issue of property condition. FHA is even more strict than conventional lenders on property condition.
- That said, FHA has a loan program for houses that need some renovation called 203(k):
They're not always easy to get, and they won't let you buy completely destroyed properties, but if you're willing to live in a place for a year while you fix it up, this can be a great option.
- Hard money is a last option in my opinion. The reason being, it's expensive. I'm not saying you shouldn't use it (I have before), but it should be a last resort when you've exhausted all the more inexpensive options. You'll still need to come up with about 20-30% of the costs yourself.
- Private money is a great option once you have a little bit of experience. Private money lenders are going to want to know that you are a safe investment (again, some experience), but once you can prove that you can consistently provide 8-12% returns, you'll find a lot of people are happy to trust you with their money.
Spokane, WA · Member since 2013 · 3 posts · 0 votes
13y
Conventional mortgages do not do non owner occupied/ investment properties.
Conventional mortgages are not built for the short term.
Most of the properties needing rehab do not qualify under conventional guidelines.
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
13y
Originally posted by Cole Young:
Conventional mortgages do not do non owner occupied/ investment properties.
Cole -
This is incorrect. You can certainly get conventional mortgages on non-owner occupied investment properties.
That said, FNMA or FMAC underwriting guidelines will stipulate that the property must be in a certain condition (typically move-in ready with all the major mechanical systems working, etc); many properties purchased with the intent to rehab will not hit that condition standard and therefore won't get through underwriting.
Real Estate Investor · Avon, CT · Member since 2009 · 52 posts · 2 votes
13y
Hypothetically, say I was going to move into the house and stay there for a year or so, but let the bank assume I was going to stay long-term. While living there I decide to perform numerous upgrades and increase the value of the property. Before I know it (1 year), the property appreciates 40% of its purchase price. I now decide to sell.
What would be the difference in finding a short-term private investor versus taking out a mortgage here? Are there extra costs associated with a mortgage that a private short-term lender does not assume?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Mike,
If you could in fact use conventional funding for rehabs, that would mean your offer would be financed and require a ton of lender criteria and approvals making your offer very weak.
The fact is, conventional financing rehabs are not available simply because they are investment properties (NOO which stands for Non-Owner-Occupied). There are some lenders that do NOO loans of course, but keep in mind the point I made above.
Access to funds and the quickness of funding is key in making offers on rehab flip projects. Of course all-cash is the strongest.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Originally posted by Mike Rubin:
Hypothetically, say I was going to move into the house and stay there for a year or so, but let the bank assume I was going to stay long-term. While living there I decide to perform numerous upgrades and increase the value of the property. Before I know it (1 year), the property appreciates 40% of its purchase price. I now decide to sell.
What would be the difference in finding a short-term private investor versus taking out a mortgage here? Are there extra costs associated with a mortgage that a private short-term lender does not assume?
Your wording here gives me the appearnce of non full disclosure which could be mortgage fraud. Your intent is key. But lets say you did in fact intend to make it your primary residence. Then, the property would have to be in a condition that qualified for conventional financing and second, you would have the same problem of getting the deal accepted over all the other all cash offers and or non-contingent private money/hard money loan offers.
As for fees, a HML will typically charge anywhere from 2-5 points for the loan.
Residential Real Estate Agent · Mt. Pleasant, SC · Member since 2010 · 257 posts · 130 votes
13y
Hey Mike, born and raised in Avon here. Living in SC now, but nice to see an Avon investor. What areas are you targeting?
Others have hit on the main points here. Private money gives you a lot more flexibility than a mortgage. You may pay a higher rate, but be able to move quicker, and your offers are more likely to be accepted. Banks will lend on investment properties, but they are not really set up for short term deals. As the market is getting more competitive, it's more important than ever to have someone with cash that can fund your projects.
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
13y
A few thoughts:
- A conventional mortgage is generally going to be cheaper than private money or hard money. Conventional loans these days are going to run about 5%, with maybe a point upfront. Portfolio lenders (small banks that lend their own money) are probably closer to 6.5% on shorter-term loans (3-5 years), private money is going to be in the 8-12% range and then hard money can be anywhere from 12-18% with 2-8 points.
- The lending/underwriting standards are going to go the other way though, with conventional loans requiring the most documentation and the best condition of the property and private/hard money requiring the least documentation and condition of the property.
- As everyone has said above, you're not going to be able to get a conventional loan on a property that isn't move-in ready or that has mechanical (HVAC, electrical, plumbing) issues. Even a broken hot water heater or missing oven can make it difficult to get a conventional or FHA loan.
- If you're not planning to live in the property, I'm a big fan of portfolio loans if you can find them (e.g., for an investment). You pay just a little bit more, but they are generally much more flexible on property condition and their underwriting standards are a *bit* more lenient.
- You mentioned living in the property for a year. If you can commit to a year, an FHA loan is a great way to get into a property VERY inexpensively, but again, you have the issue of property condition. FHA is even more strict than conventional lenders on property condition.
- That said, FHA has a loan program for houses that need some renovation called 203(k):
They're not always easy to get, and they won't let you buy completely destroyed properties, but if you're willing to live in a place for a year while you fix it up, this can be a great option.
- Hard money is a last option in my opinion. The reason being, it's expensive. I'm not saying you shouldn't use it (I have before), but it should be a last resort when you've exhausted all the more inexpensive options. You'll still need to come up with about 20-30% of the costs yourself.
- Private money is a great option once you have a little bit of experience. Private money lenders are going to want to know that you are a safe investment (again, some experience), but once you can prove that you can consistently provide 8-12% returns, you'll find a lot of people are happy to trust you with their money.
Real Estate Investor · Avon, CT · Member since 2009 · 52 posts · 2 votes
13y
Originally posted by Chris Calabrese:
Hey Mike, born and raised in Avon here. Living in SC now, but nice to see an Avon investor. What areas are you targeting?
Hey Chris, always a pleasure to talk to a fellow Avonian. What made you decide to relocate to SC? Was it for real estate?
To answer your question, my target market is still up in the air. It could be Hartford County or Fairfield County, or it could even be Florida. Undecided at the moment..