All Forum Posts by: Perry Farella

Just to put this out there, yes there are conventional loans that will appraise only to ARV. You just need a written contractors proposal to had off to Appraiser and lender will appraise to ARV, not purchase price on contract. If numbers work then loan should be approved. Its designed for small investors and not for those wanting a loan to an LLC. My blog below has examples of what I have seen.

There is a rehab loan that can be done as a refi to pay off the current mortgage plus add dollars to rehab. Its based on what the future value will become with the rehab installed. So a HELOC would only consider todays value, not the updated future value.

I have done many of them with investors and happy to answer questions.

Just to add a bit here. Hard money lenders can be useful and I know many of them. That said sometimes it better to consider a more traditional approach. In this case perhaps this guy didn't want too much risk in one small area  if he already was working with your buddy up the street, not sure.

I am very familiar with traditional rehab loans for investors and have a lot of experience doing them. They work because the property is pre-appraised to its future , finished value by showing an Appraiser the contractors proposal with all costs and updates to be done. Plus future rent is given to you at 75% of gross rent, as determined by Appraiser, to help meet traditional qualification guidelines. PLus usually fees are much less than hard money lenders and it s fixed rate for 30 years. An alternative to consider at least for a small investor.

While not a government grant there is a rehab loan for 2 unit properties that can be done as a refi since it is a first lien 30 year term fixed rate mortgage. I'm happy to address any questions.

Brian,

There are conventional 30 year term loans available to single family investors who do the BRRRR approach. Limits is that the loan is in the name of individuals and not any LLCs. Also cannot have more than 4 mortgaged properties in your name at one time. So they have to cycle off once you get to 4.

These are advantageous for small, initial investors. But if you already own more than 4  mortgaged properties they wont work. Maybe a local bank or hard money lender is better for larger investors.

But I'm happy to answer questions fro you .

Alex,

You can buy a single family home to buy/hold on a 30 year term mortgage with 15% down. Rates are at todays rates based on your credit score, no higher than perhaps 5.75%. You get the low payment of a 30 year term without the worry of having to find financing out of Hard Money after a year. hard money guys may charge up to 35 of loan size in fees and up to 12% in annual interest. True there may no down payment but that 3% is wasted money in some context. Hard Money is great for short term needs but it gets expensive. It has its place of course but be carful not to over extend your self.

There is the Fraud Enforcement and Recovery Act from about 2009. Mortgage fraud punishable by up to 30 years in Federal prison and $1M in fines. It would be unwise to ever lie on a federal insured loan such as a FHA 203k. If you use an FHA 203k rehab loan just plan on living in a nice apartment you rehab to your taste as owner for 12 months, then lease it out. You can always refi out of it into a conventional investor loan if you have the equity, just sell it. Then repeat with a new FHA 203K rehab loan on the next one. Note though can only have 1 FHA loan active at once as was discussed earlier in this thread. Very few exceptions around that EVER granted.

Just to a bit as a lender doing many 203ks FHA loans. Yes you agree to occupy for 12 months. You can add up to 6 months of house payment funds (piti) into the rehab portion of the loan provided you qualify to borrow it all. Lenders will project , using a local appraiser , what future rents will be based on similar area properties even if building is vacant and not livable. Then 75% of that future rent from rental units will be used to help you qualify as extra income. On a 203k FHA expects the rehab to be completed in 6 months max.

As a first time investor it is a great entry loan with only 3.50% down needed. This is the sum of purchase price plus rehab dollars plus the 6 months house payment money plus a 10% to 20% emergency reserve for unexpected extra rehab costs popping up in the rehab process If you don't even need to use to 10% to 20% emergency fund then the loan reduces at the end and you don't borrow it.

Example :  purchase price = 100,000 + 50,000 for rehab and 15,000 for reserve and x months of piti= 165,000 so 3.50 % down is then $ x5775.00

HomeStyle is an alternative but on a 2 to 4 unit it is 25% down. Must occupy for 12 months like 203k.

Another loan for Investors on 2 to 4 units is available to add rehab dollars into a 2 to 4 also that does not require owner to ever occupy. But down payment is 25%. Good news is its a 30 year amortization with no pre payment penalty for flippers who sell quickly. Check out my blog on renovation loans for examples.

There are pros and cons to 203k for sure. I have experience with them on large and small projects. If you can live in one unit for 12 months ( requirement before turning it into all rentals) then a 3.50% down 203k is a great option to get you in and get the reno dollars needed to bring it to livable standards. 203K FHA may require you to spend more than planned to fix any broken concrete, peeling paint, missing handrails on staircases, etc. So all that has to be in the General Contractors bid or you can use 3 separate contractors if you want. There is also an automatic 10% to 20% emergency reserve added to base budget to protect you and the lender from cost overruns or unforeseen issues that later occur during construction that are required to be fixed or local building codes you may not know about require more than you planned. Always check with the local building dept. before buying to be sure you know all that will be required to be updated.

I like 203k for a newbie investor because you get the protection of the 10% to 20% emergency reserve on the loan and if never used you just don't borrow it so loan amount reduces at completion. I'm a big fan of the 203k Full or Standard because it adds the eyes and experience of the HUD Consultant to walk and inspect the property to give you added experience you may not have. Costs a little more but protects you from making a mistake on a property that is too expensive for your numbers to work perhaps. 203K Streamline or Limited does not offer that protection so I rarely use it as a lender doing these for many clients, even small jobs under 35k, its just wiser and better for everyone.

Plus as a 203K owner occupied loan you can borrow up to 6 months mortgage payment money in the loan if you have to love somewhere else during rehab and have a second housing cost to pay elsewhere.

All this versus Hard Money lenders - my view would be they are very useful in the right situation but fees can be 3 points (percent) and rates 7% to 12%. So rather expensive.

Another loan I use is called EZ C Rehab for investors of 2 to 4 units buildings. But it requires 25% down so may not be of help to you.

I have always liked the idea of not putting more debt on your personal residence to be cautious at least at the start ( like HELOC to get cash). That way if worse comes to worst your residence is not at risk. There are some nice renovation purchase combo loans amortized for 30 years that give you the dollars to rehab, albeit using a licensed GC, not you doing the work, with a 20% down payment. The numbers tend to work because you get credit for 75% of future gross rent when house is rehabbed which is used to help you qualify for the loan. Plus the future , finished value of the house is used or ARV (after renovated value) to approve the loan. My Blog has stories about these loans. They can be for 1 to 4 unit type properties as well. I have helped investors just starting out to acquire properties this way, at minimal risk to themselves while learning the basics.