All Forum Posts by: Sam Elder

A rehab-to-perm loan gets you into properties in a very short amount of time and allows you to establish a long-term ownership position with as little as 10-15% of the total deal cost (purchase price + rehab).  Compare this to 3-4 weeks for a mortgage with that will require 20% down and force you to shoulder the entirety of the rehab.  Find a good hard money lender that can also transition you to long-term financing (in-house) upon completion of the rehab.

There are instances where cash makes the most sense (followed by delayed financing or an eventual cash-out refinance).  There are times when a purchase mortgage makes the most sense (time available and a small rehab required, common on retail properties), and there are times when a rehab-to-perm makes the most sense.

Know your options, and do not settle for a lender that has one option and forces you into a box.

FWIW - I am not that person in your market, so please do not construe this as advertising.  I am just trying to provide helpful advice.

Fair enough, David.  Going forward I will provide better clarification.  Fannie Mae will allow a single Borrower to have ten financed properties, and in a vast majority of instances, FNMA is the least expensive path to home ownership with the best terms.  My experience has been that 4.625% on a 30-yr fixed rate FNMA loan today is better than what is offered by non-FNMA lenders that are portfolioing loans (6.00% on a 5-yr loan with a 20-yr amortization).

At a certain point, some investors have a need to go beyond what FNMA will provide, and at that point, banks become a viable option.  That said, short loans with high(er) interest rates are not in the best interest of most investors where FNMA is an option.

And also relevant is that you can no longer utilize cash out refinances after four financed properties, but you can continue to utilize delayed financing all the way to your tenth mortgage if you otherwise qualify.

Up to 75% not to exceed the purchase price. In other words, the lesser of 75% LTV based on an appraisal specific to this transaction and the purchase price (with closing costs added in).

It's a great way to keep the majority of your funds in play.  Let's say that you spend $75,000 on a property, spend $10,000 to fix it up after which time it is worth $100,000 (just throwing numbers out there not evaluating this as a good deal).  You get back 75% of $100,000 which is $75,000.  You are not recpapturing the repairs, but the vast majority of your capital can now be redeployed.

That's a very good starting point, but it's just a starting point.

For starters, different investors will have different formulas.  Something as basic as the back end Realtor commissions can change your model.  Are you paying out 3% + $500?  5%??  Full 6%???

Another HUGE variable is the scope of rehab and how long will rehab last.  A 70% deal that you are in and out of in 60-90 days is a lot different than a massive rehab that is going to "best case" run 9 months.  The bigger the project (both in scope of work and time to complete) needs a bigger margin for you

And you will certainly have one set of relatively hard guidelines that you use for flips as opposed to more lax ranges when dealing with buy/hold properties.

You have less room for error on flips, and anything that goes "wrong" impacts your bottom line negatively.  If you get too far beyond 70%, you are putting yourself in harm's way.  With buy/hold, you can focus more on the property (that you are going to own for 5+ years) as opposed to passing on anything that isn't 70.00000% or better.

Sam

Nick has some great advice that shouldn't go unnoticed; however, I think I will add to that with my personal experience.

MOST conventional lenders (FNMA loan providers) require seasoning.  Most, though, is not ALL. You can transition to a 30-yr fixed rate FNMA immediately with some lenders, so it's important to find a investor-minded lender that will accommodate you.

Doing this is HUGE for several reasons:

1. You can benefit from equity in the property at the time of purchase when you go to refinance. Most hard money loans are at 70% ARV, and the LTV on a RT refinance is 75%. While you cannot benefit from equity on a purchase mortgage (you are still putting down 20% or 25%), you can capture equity by way of a rehab-to-perm process. This allows you to purchase then rehab then retain a property for very little (relative basis) out of pocket.

1b. You can include rehab in the refinance, which is a part of keeping your out of pocket as low as possible.

2. You can use the rental income for qualification.  As long as you have the property rented, you can potentially use that income as qualifying income on the refinance.

3. You stay in the HML for less time. Instead of needing to wait six months or a year at xx.99%, you can be in the that hard money loan for a shorter period of time.

Best suggestion I have is to find a lender that offers both hard money loans and conventional financing.  

Rajib and Dinesh - 

Hey neighbors! I live/work in Irving, and you are located in one of the best areas in the United States for real estate investing. Having MLS access is critical, so you are both on the right track. That said, seek ways to build relationships that get you ahead of the masses. Dinesh, your ideas on lead generation are great!

Best of luck to you Dinesh and you, too, Rajib.  Hopefully our paths will cross at some point in the future.

Sam

 Utilize reasonable leveraging for rentals.  Having one rental that you own free and clear is "neat", but it comes at the expense of 5-7 other rentals.  You can acquire 6-8 rentals using leverage for every one you purchase in cash.  Under this scenario, you would have mortgages (currently 740+ credit gets you 4.875% on a 30-yr), but you would also have 25% - 30% equity (or more if borrowing created anxiety for you) to alleviate much of the risk.  Unless you had too much money and were forced to diversify beyond what nearly all of us here could comprehend, I couldn't imagine tying up money in rentals when the cost of capital is historically cheap.

If you are intent on having high monthly cash flow, wouldn't it make more sense to have cash instead???

Passive income opportunities that real estate investing provide can be exciting for families.  Houston is a GREAT area because of the tremendous growth that the region is experiencing.  There's a learning curve, but you are in a good place to make that process as uneventful as possible.  Additionally, you have wiggle room to make small mistakes as you earn without severe consequences.

You are right, thouh.  The human element does exist, and that can be particularly meaningful to people such as yourself.

Good luck!

Here are reasons you buy with cash and then immediately refinance using delayed financing:

1. Cash buyers almost always have the better offer - whether this is correct or not, perception becomes reality.  Put it this way - you will never be penalized for being a cash buyer.

2.With most distressed properties you cannot get traditional financing.  First of all, the seller isn't going to wait for you to get a mortgage.  Second, you probably won't be able to get a mortgage if there are issues with the property (that otherwise make it a good value).  You forego these issues with delayed financing because you are rehabbing the property between purchase and refinance.

Because we provide all types of financing, I can honestly say that there are cases to be made (depending on the situation) for paying cash then using delayed financing, purchasing with a mortgage and finally using a rehab-to-perm loan process.  There's not a one size fits all, which is why it's important to have a lender that provides every option.

What's disheartening for me is to see people in lending field give poor information on financing options because their outfit has a limited offering. Cash buyers CAN and SOULD get their cash out within the first six months by way of a Fannie Mae loan (if ratios qualify you).  FNMA is still the least expensive path to ownership, and you can get delayed financing all the way to your ten properties (primary plus nine). Waiting six months for a cash out refinance only works three times for most borrowers - four if your home is free and clear.

Sam