All Forum Posts by: Perry Farella

A third strategy is to put all the debt not on your current residence but on the next home to be acquired and you can add all the rehab dollars into it as needed. This is called HomeStyle conventional investor mortgage. It requires a 15% down payment off sum of purchase price and rehab dollars needed, done as a 30 year term, no pre penalty if you want to fix& flip, uses projected future rent from the house as extra income to qualify. This way your own home is still on track to be paid off and there is no extra risk of adding a HELO or doing a larger refinance there. No chance of mortgage fraud since it is an Investor loan not an owner occupier loan. Happy to answer any questions.

Just to add here that there is a rehab loan designed for newbie investors with built in checks and balances called HomeStyle others here have used. I use it for my clients on their single family investment property rehab purchases. You do need though a 15% down payment. But it gives you the oversight on after renovated value (ARV) and if the value isn't there the loan will not be approved. It also builds in a 10% emergency reserve fund based on the rehab budget to provide a cash cushion if a house later is found to need more work or a cost overrun etc. AND this 10% is built into ARV on the assumption you will use it. So you are protected. EXAMPLE: House sells for 100,000 but needs 40,000 in rehab so total transaction is 140,000. The add 10% Reserve to rehab budget or 4000 for grand total of 144,000. Down payment is 15% off the 144,000 or 21,600. So your own funds or with a partner are the 21,600.

 Then you have financed both the purchase at 85% and the rehab at 85% of the deal. The loan is based on a 30 year term and todays rates around 5% to 6% but no pressure to pay to off, you could keep it over 30 years or sell and pay off the loan, all with no pre payment penalty. The principal and interest payment at 6%  is $730.20 ( plus taxes, etc.). So if you can carry that payment for the months it takes to finish the rehab prior to selling or renting it out, you are successful. The lender will always project the FUTURE rent automatically ( they don't know if you will sell it or rent it after all so have to assume renting) and give you extra income at 75% of gross projected rent as qualifying income for the loan approval, even on vacant trashed properties.

Maybe you don't yet have the 15% down but compare this approach to interest and fee costs of hard money lenders that can be from 8% to 15% around the country to this approach. Happy to be more specific any time.

In student housing you have all the money up front at start of each semester, even for a summer term most likely. That in itself is an advantage over a traditional tenant who pays monthly. Terms are maybe January to middle or end of May so that's 5 months of rent in advance and you have time to plan June, July and August terms if the school offers a summer term. Or maybe Fall term starts late August to middle December so you start the lease on August 20 to Dec. 20 ?  Either way you are pricing so you make what you need and don't view it as a monthly rent anymore. Even if the unit is vacant for June and July, you have priced the Semesters accordingly to build in missing whatever a monthly June & July rent might be is how I would do it. Look at it as 2 Semesters of income instead of monthly and build in a 3 month vacancy just in case by dividing that cost in two and adding each half to the Fall and Spring semester cost. Or offer a discount if a student can commit and PAY in ADVANCE for both Fall and Spring terms. Plan accordingly with detailed leases on parties, number of occupants, no smoking,  quiet hours, etc. so it doesn't degenerate into a frat house. Often there are students who are seeking out housing that is quiet with no partying as well as clean and modern so looking for dorm alternatives. Market to the nerdy students :)

If using HomeStyle as a duplex I'm assuming you live in one and rent the other ?  HomeStyle is for single family Investors only or if owner occupying then you can use it with a 20% down payment based on sum of purchase price plus rehab dollars.

Often on student housing you collect rent by Semester, not by month since students don't work enough to make rent each month, be careful of that. Student housing can make money for you mostly because you collect each Semester rent in advance. Students have loans, scholarships or parents to pay in advance. Co-signing with parents is not the best approach and I wouldn't do it. After all students cant pay tuition monthly why allow them to pay rent monthly ?

All of the above sounds like nice work if you can get it :) But the layers of risk to a newbie investor are not in your favor and you didn't even tell us what interest rates the HML and PML will charge you. I'm guessing the original poster doesn't have any funds saved but wants to do this anyway ? Or the deal is so good its too tempting ? Please be VERY careful.

A safer suggestion would be to save some money ( don't borrow it, just take time to save it so its all yours with no interest due on it) then consider a fix/flip where you have your own money for down payment, say 15% on a house and use a safer 30 year term fixed rate rehab loan if you have to borrow money. I have seen investors do this by buying a house and then adding in cash to rehab, then bringing a 15% down payment off that at a reasonable interest rate of say 6% but on a 30 year term to pay, I.E. $6 payment a month for each one thousand dollars borrowed. Example: House sells for $200,000 at a discount because its trashed or badly out dated or both, it needs 100,000 for rehab to be a first class HGTV quality rehab that will be appraised to have after reno value (ARV) of say $375,000. So use your 15% down payment to get all this rehab money and buy the house is : 200,000 + 100,000=300,000 X .15= 45,000.

Then you have 30 years to pay it off or fix/flip it and pay off the loan and repeat. Monthly principal and interest payment even at 6% would be $1521.24 (plus taxes, etc.). So that's your monthly carrying cost but you have a fully financed rehab project and if ARV makes sense then its a good deal. Appraisal is done prior to loan approval so if AR value doesn't look good then walk away. So here is the part where you need a way to pay the monthly cost during the rehab until you sell it or rent it. These are large numbers but it works even better for smaller numbers. Its a lower cost way and a safe way to buy , rehab, refi or sell and repeat.

Im not involved with hard money but an alternative at half the cost is called HomeStyle. You need a 15% down payment based on purchase price plus rehab dollars needed. 30 year term, rates around 5% to 6% for Investors, no pre payment penalty. Your Example: buy at 120,000 + 40,000 for rehab means a down payment of 15% or 24,000. Then fix and flip with no pre payment penalty. Happy to answer questions any time.

Just to contribute here. There are two loans that are fixed rate for 30 years to buy and add funds to rehab. One is called HomeStyle . For investors down payment is 15% based on sum of sale price plus rehab dollars needed. Then you can fix and rent or fix and flip with no penalty and have  security of a 30 year term loan.

Or there is a version for 2 to 4 unit small buildings as well but then down payment grows to 25%.

Or if you agree to live in it for 12 months you can do it as an FHA 203k rehab loan with as little as 3.50% down on 1 to 4 unit properties and use future rents to qualify for the loan size needed. This is often the best option for a first time buyer with limited funds. On BP I have added various blog posts on how this all works. Happy to answer questions any time.

Yes, you must have another licensed contractor unless you have a GC license already. If so you cannot profit by charging any labor to yourself. The loan was designed for those who are not themselves doing the work, unlike a Hard Money lender who may just give you cash with no restrictions. All required building permits and any architects plans must be part of the project and the loan will pay for them too.

I do these for investor clients regularly to fix and flip or fix and hold to lease. As an investor the down payment is 15% of the TOTAL of purchase price + rehab dollars needed. Then property is appraised off general contractor documents showing all work and costs, to its Finished Future Value or ARV. All HomeStyles are for single unit properties only like homes, town houses and condos but not multi-units or duplexes. Example: Buy for 100,000 and add 50,000 to rehab total is 150,000 so down payment is 15% of that or 22,500.

If you use HomeStyle to buy a property you will live in for 12 months then down payment can be as little as 5% given its to be Owner Occupied. A good option for a first time buyer maybe. Two other rules: You can only be mortgaged on 4 properties with HomeStyle and the rehab dollars cannot be more than 75% of ARV. This is a loan for new and small investors only is what they are saying. Rates are a 30 year term fixed rate, based on buyer credit score but these days between 5% and 6% typically. Much better than any hard money lender and no pre-payment penalty if you sell after completion to do it all again.

To give a better example I recently had a client buy a 4 unit building in Chicago for $82,000. All in in with architects fees, Permits, HUD Consultant fees etc. his total rehab budget with a 15% emergency reserve became $398,372. So 82,000 + 398,372= 480,372 X .035 for down payment, etc. leaves 459,031 final mortgage size. But his ARV came out to 425,000 so he is mortgaged to about 108% of ARV. FHA allows this even though we might normally not like it but the future rents more than carry the total mortgage payment of about 3112.00 all total each month. The property is a total interior rebuild, new floor plan, separate HVAC for each unit, 2 baths each unit so a condo high quality like rehab for sure. But all possible with just 3.50% down if ARV supports it and rents support it. Buyer lives there for 12 months then moves on and leases all 4 units. Buyer is a first time buyer too.