Advice needed for deal in chicago

7 Replies

Hello again everyone,

I am currently considering a deal in Chicago using the Buy, Rehab, Rent  and refinance strategy. I will be buying with hard money and refinancing into a conventional loan. Below is the high level view of the deal details.

Purchase price of the building is 260k and estimating rehab at 70k. I am using 11% interest and 4 points to factor the hard money loan. Refinance is being factored at 80% cash out and 5% long term interest rate. My goal is to be able to get all the hard money repaid from the refinance. My money can stay in if needed. So even if the ARV drops to 400K i can still refinance to pay off the hard money.

Also i included management to see its impact. I plan on managing this for at least the first 2 years till i get enough units (10+) to hire a property manager. So the number for the first two years will actually be better. And this is a long term hold in an A/B+ area with low vacancy and good chance of appreciation.

Please proceed to tear the deal apart. I want to see all that i missed or did not notice. 

Thank you

Originally posted by @Nnabuenyi Anigbogu :

Hello again everyone,

You're level of detail is good but I'd add or consider the following from a risk standpoint. You'll only be able to refinance into the conventional loan when the renovation is complete. If your Hard Money loan has a balloon payment or penalties to renew @ the end of 6 months you should assess the potential financial impact of a renewal on the deal. If you're $70K renovation is a lipstick job then getting in & out quick is probably not an issue. I define lipstick as anything that doesn't require replacing mechanicals, opening up the walls or putting on a deck. If it's more than lipstick there's always the chance of finding something that will lengthen the project which then means potential HML penalties. See if you can get into a 9 month or longer HML package to avoid penalties & mitigate the financial risks.

I am with Crystal on this one. As soon as I saw the HML line I started saying "no no no"

I think it is the worst idea to use a HML on a buy and hold. A lot of HML's I know will not take on a project if your exit strategy is to refi it. Not only are the penalties for going over steep - but what if the bank wants 1 year of seasoning, what are you going to do? Have you already been pre-qualified for the loan? What if your DTI or credit prevents you from getting a loan, then what?

I would look into a 203k loan if you want to rehab.  You can put 3.5% down of the purchase and rehab 

As @Crystal Smith and @Brie Schmidt mentioned, you should be careful on the HML and ensure your exit strategy is solid.

As far as the numbers, doesn't look like you accounted for all of the buying and holding costs (appraisal, inspection, closing costs, utilities, taxes) during the rehab and refi so make sure you account for those costs.

Given all the work you're putting in here, would you be satisfied with a 6.72% cap rate and $3k in cash flow? Can you buy something with equivalent returns in the area that won't need a full rehab? A flip profit of $59k is great (especially on a personal investment of 50k), but not sure if you can't find solid deals that mimic the buy & hold returns without needing as much rehab.

@John Casmon raises some very good points about the refinance. 80% LTV is attainable as a loan amount - but in your spreadsheet, you need to look at loan PROCEEDS, not loan amount. At minimum I would assume that you will have 1 point in closing costs, and another point in misc. fees. Also when you are refinancing a new purchase with a commercial loan remember that the bank is going to want to escrow taxes and possibly a management reserve - which will further reduce your loan proceeds. Try to keep your HML to 60% of ARV if you're going to take that route. 203k only applies if you're going to live in the property - if I'm not mistaken.

Thanks for all the input everyone. It opened up some avenues of thought for me. I decided not to do the deal due to some permitting aspects that would involve dealing with the city of Chicago and potentially tearing down the work of the previous owner (he started doing a lot of work with no permits and it wasn't to code). Also the HML was definitely quite expensive and i wasn't to comfortable in my ability to do the deal successfully.

@Brie Schmidt I know you own a lot of buy and holds and i assumed you used the refinance strategy that i was trying to implement. How did you go about funding the initial purchase? Private money?

Thanks again all

@Nnabuenyi Anigbogu

I usually just buy it already rehabbed with regular financing. If there are city violations and they are on title then your only option will be a 203k or a HML... just MAKE SURE you can qualify for the loan after the work is complete and understand that they might not go off of the full ARV

I wouldn't give up on the idea of purchasing a distressed, renovating, then moving into a long term loan.  We've done it & we have some clients who use the same strategy.  Just have to be very careful about how you go about it.  

I'll send you a PM for a local contact we've used in the past to refinance out of an HML. Rates about 1 year ago was 4.5% w/ 1 pt & 85% LTV. 45% DTI. Seasoning wasn't an issue.

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