All Forum Posts by: Mike Klarman

I think just starting out, holding debt is bad unless you have limitless capital.  Think about this scenario:

Two investors by a property for 100k and put 40k into it to get a 185k ARV. They are new investors so they must put up 20% of purchase in fix n flip program. So each is going to be responsible for 20k right there. Then you will pay 2 points of the loan amount. Loan amount will be 80K + 40K for each so 120k. So 2,400 in loan fees and then another 1500 lets say in hard closing costs. So that is an investment of 23,900 total for each. Both guys just starting out and have just enough money to do one deal to get going.

In three months the work is done and now one investor is going to sell for 180k.  He will pay off the 120k loan, recoup his 23,900 in investment and be left with 36,100 - RE Agent fees.  Maybe 32k profit.  So this investor now has their original 24k they had to invest plus 32k profit on top.  They now have 56k to work with for deals.

Investor two decides to refi.  He'll get 75% of that 185k = 138,750.  He'll pay off his 120k loan and be left with 18,750.  Out of that will come the points you pay to get the rate you like, anywhere from 2 points - 5 points if you want the lowest possible rate - right now is about 6%, or pay two points and get 6.85%.  So that's about 4 - 6 k in fees on the refi plus 1500 hard closing costs.  So you will get 11,250 back in a refi net profit.  Do you have a cashflow coming in now?  Yea, but your profit is loan amount minus rent so it may only be $200 per month.

So one investor has 11k in the bank, can afford no more deals, but has $200 per month coming in, the other has 56k in the bank and ready to do another deal.  Who do you want to be?

Don't hold until you can afford to have liquidity tied up for a long time.  

I always tell people that you'll need to put up 80% of purchase on flips 1, 2, and 3 which makes the property value small, but on flip four you'l be able to afford a real estate deal where the purchase price is 350k+.

Anyone offering you 4% and 100% financing is probably a scam.

Yes, people do lend 100% financing but there are often lots of qualifications to go with it like a minimum number of houses flipped or held in last three years plus a great credit score and lots of deals with the same bank.

For anyone new to get started, you'll need 20% of the purchase price for flips 1, 2, and 3. Once you have 3 in the books you can get 90% of purchase. So to get started at that min 100k as-is value property, which is the floor for most reputable lenders, you will need 25k - 30k. But if you stay clear of the second and third Rs in the BRRRR strategy and just sell, then your fourth deal can be a property worth 300k+ and have an ARV in the mid 400s. You'll profit 50k min and up to 75k on deal 4.

Just need 680 credit (so you do not take a leverage reductions) and that 25k -30k.  That's the barrier of entry for new flippers/rehabbers.  But in 18 months - 2 yers you could be well on your way with those 3 under your belt and now you can afford higher end real estate deals and make that 50k - 75k per deal.

You will need to put up 20% of purchase unless your credit is really good, maybe 750+, then 15%.  So right there, that’s most of your 20k.  

100k as-is value is the floor for a lot of lenders as far as property value goes.  For a beginner to secure a fix n flip loan on a 100k purchase price you will need 25k -30k.  Most of that will be equity in the house, a few percent will be fees.

I think finding a 100k property in Florida might be tough.  It’s a hot bed for flippers.  Indianapolis, maybe.  Des Moines maybe.

With a 680 credit score and 30k any investor can get the ball rolling on a flipping career.  You just have to sell, sell, sell until you can afford to hold debt and tie up liquidity.

Anyone with 680 and 30k in capital, I can show you how by your fourth deal you will profit 50k - 70k.

Right now your payoff amount is 63% LTV if value is 300k and 58% if 330k. A lender will let you refi cash out for 75% of value. 80% if 760 credit.

At 300k you’d get 225k in a loan.  Payoff the 191 and pocket 34k.  If 330k is value get a loan for 247k, payoff 191k and pocket 56k.

If your looking for a line of credit on the equity sitting in then house then ask your mortgage holder if they’d let you tap into it and how far would they let you go.

If value is 310k let’s say.  You owe 191 and want to borrow another 100 and go to 291 in debt. That’s a 93.8% debt to value ratio.   that’s how people get under water on a property.  Not sure if a lender would want to find themselves there.

The DSCR 75% LTV loan scenarios I gave you are a possibility.

I'm a fan of the flip over the hold early on. People wanna jump right into the BRRRR. But can you afford to have equity tied up? Is this 300 net cash flow per month worth having 30k tied up? For most new investors not really. That 30k in profit means more.

People call me all the time and tell me they wanna buy something for 250k and have 10k.  Well, there’s nothing I can do for you. You need 20% down.  That’s 50k.

You’re doing 100% right thing.  My boss doesn’t like me to recommend it to people because as a lender of you refi that’s another loan and more business.

Build your bankroll by flipping small houses.  6 deals is aggressive.  You get 6 done and my hat is off to you.  That would cost a pretty penny to have like three deals going at any one time.  

Keep flipping until you have like 200k and then you can afford to hold debt and building that monthly cash flow.  Always be flipping in the b.g. Though.  That’s the bread and butter to keep the train moving.  Monthly cash flow is the retirement money.

Your lucky.  You have a good job and can afford it.  For most people the liquidity is what’s lacking.  Just to let everyone know.  If you can come in with a 680 credit score and like 25k, I can show you how to do your first deal and get the flip train going. In 18 months, you’ll have 2 deals under your belt and have 50k profit with your 25k investment and now you have experience too.  Once you have 3 flips you’ll get 90% of any purchase in the fix n flip program.  100% of rehab.  And now you can afford to buy something for 300k, put 75k into it and sell it for 450k.  Your fourth deal could profit you 75k.

Good Luck on your journey.  If you have any questions about the process feel free to reach out.  How Draws work, what you could expect in fees and closing costs, etc.

First, I'm guessing this is a short-term loan.  Like a 12 month loan with no pre-payment penalty, with monthly interest only payments with a balloon payment due at maturity?

Or are you lending a couple investors the transactional costs of securing debt?

If the former, rates can be anywhere from 7.99% all the way up to 12.5%.  It depends on their experience.

If the latter then you want a guaranteed rate of return. So if you lend someone 60k which allows them to secure the costs of borrowing 300k - 400k then you want a guaranteed 10% ROI so at a certain date agreed upon by both parties they owe you 66k.

Hard Money rates are always a few ticks above the private home mortgage rates. Add .5 tp .75 to that rate and that's the 30 year rate on HML, or that is the rate you can buy down to. A deal I just did the full buy down rate was 6.05%, the highest rate was about 7.25% if you didn't spend the money to buy down. Rates for short term range in that 8% - 12.5% range, depending on experience of borrower.

How do you vet clients?  I'll tell you what we do.

1) Complete credit and background check

2) We get bank statements

3) We check entity docs if LLC borrowing the money

4) We set up an auto-draft payment in an account of their choosing

5) We do a Corelogic study on all their experience.  That verifies the houses they sold/held last 3 years.

Contracts can be as simple or as complicated as you want.  If both parties sign the contract is executed no matter if it was drawn up by the parties or a lawyer.  When money is involved have a lawyer do it.  There are clauses protecting you from thing you do not even know about that they would know and you would not.  Better yet have a lawyer help you create an application for a loan.

Be very picky and do your homework before giving anyone any money.  You should want to see an appraisal first of the property cause borrowers over value the assets they like.  Protect yourself. 

You are finishing up a fix n flip with a lender?  Each lender will have some seasoning guidelines.  How long have you held the property? 

The rules for a refi cash out are that you need an active lease and proof of two deposits.  Either rent and security or two rent receipts.  Once you have those you can refi up to 75% with a low 700s score.  I think around 760 you can get 80%.  You'll pay off your bridge loan and keep any profits and then add the monthly cashflow of the property to your portfolio.

I'd be happy to help you run some numbers on it and get some pricing you can use as an appraisal on the deal terms.

I can add this as a lender.  GUC loans have the most stringent guidelines.  If you have 0 GUC experience most won't even deal with you.  You'd need to find a guarantor that has built homes from the ground up before.  When the lender sends an appraiser out to land that will have a house on it he needs architectural designs, blue prints, itemized costs for materials.  It's very extensive and can get messy and drag on.  I have a GUC deal closing in the next week and I've been pushing this deal up the hill for 3 months.

If this is your first BRRRR odds are you will need more than 10k. You will only get 80% toward purchase price and maybe 100% of rehab, you said your credit is good so it's possible.

But for every 100k in property value you will need 20k in down payment.

Your best bet is to do a delayed purchase loan. You close in cash and then do a delayed purchase loan that includes a small rehab budget because the delayed purchase is a fix n flip product. You are buying for 425k and you know it will appraise for 500k. You you can do a loan that has a purchase price of 425 and a rehab budget of 15k and an ARV of 500k - that's a 12% return. Passable is 10% sp you're good.

In this scenario you can get 90% of the 425 back so 382,500 if you have experience ( combined number of houses held or sold last 3 years).  If you have a 3 exp then you can get 90%, if less you can get 80%.  You can get a bump to 85% with really good credit (maybe 750+).  Then after three months you can refi out of this Bridge loan and get into a 30 FRM based on that 500k value, maybe more because they will do another inspection.  So it may come one 510 or 520 maybe if you can spend 10 - 15k efficiently in the home.