Frequently Asked Questions
FIX & FLIP LOANS
What is a Fix & Flip Loan?
A short-term loan (6 to 24 months) given to buy a property, renovate it, and sell for a profit. These renovations could range from minor repairs to a complete reconstruction.
How Do You Flip a House with No Money?
Win the Powerball Lottery! Ask your rich Uncle Bernie! Find the pot-of-gold at the end of the rainbow! Rob a bank? 😉 Ask the Genie in the bottle to grant you one wish. Find a sketchy guy in the back alley.
What is the Difference Between Fix & Flip Loans and Bridge Loans?
While both are short term loans (6 to 24 months), Fix & Flip loans require renovations, while bridge loans require the property to be rent-ready.
What is the Average Profit From a Flip?
The average gross-profit (before carrying costs) is around $67,000. Net profit is on a case-by-case basis. Lower carrying cost (Example: no loan in place, no realtor used, etc.) can result in a higher net profit.
How Much Do You Need to Start a Flip?
Some private lenders offer 100% of the purchase and 100% of the rehab, but most will loan up to 90% of the purchase price. However there are many other fees to be considered. There are lender underwriting fees, appraisals, origination points, and reserves. Additionally, third party closing fees (outside the lenders fees), title, legal and broker fees that equate to 3 to 5 percent of the loan. With that said, we often tell our borrowers to be prepared with 25% to 30% of the purchase price to close the loan.
GROUND UP CONSTRUCTION LOANS
What Are Ground Up Construction Loans?
A short-term loan (6 to 24 months) given to construct a completely new property from scratch. The starting point is either raw or undeveloped land, or it can be a tear-down of an existing structure.
How Much Can You Make On A Ground Up Construction?
Generally, construction investments can make returns anywhere from 20% or higher, but it heavily depends on how well you have planned for shifting labor and material costs.
How Much Can You Borrow For A Ground Up Construction?
You can borrow up to 90% of the purchase of the land, and 100% of the construction costs.
How is a Construction Loan Different Than a Traditional Mortgage Loan?
Construction loans are short-term loans which last 6 to 24 months. They can only be used to cover construction costs or the purchase of the property whereas a traditional home mortgage is a long-term loan on an existing piece of property.
What Does Refinancing Mean?
Refinancing, in simple terms, means trading your old mortgage in for a new one with new terms and new rates. Typically, refinancing is used to obtain lower interest rates and longer terms.
What is a Cash Out Refinance?
A Cash Out Refinance is refinancing that involves taking out the equity in an investment property in exchange for a larger loan. Private lenders use DSCR "Debt Service Coverage Ratio" calculations when giving cash out of a rental property. The borrower can obtain up to 75% of the equity in the property ONLY if the rental income exceeds the new debt service — principal, interest, tax, and insurance payments.
What Is a Rate & Term Refinance?
Rate & Term is a type of refinancing that allows you to trade the current mortgage note for better rates and/or longer terms. Typically, this type of refinance is used after renovations have been completed and a tenant is in place. A Fix & Flip loan into a long-term rental loan. Again, with private lending, it would be a DSCR "Debt Service Coverage Ratio" calculation, and thus the rental income must exceed the new debt service.
Can I Get a HELOC On An Investment Property?
While there may be some private lenders who would consider 2nd position on an investment property, most will not. The risk of default is too high, and 2nd position lenders cannot foreclose on homes without taking out the first position loan.
BUY & HOLD
What is a Buy and Hold Loan?
This is a long-term loan (20 - 30 years) on a rent-ready property.
How Much Can I Qualify For?
A good rule of thumb is to have 25% - 30% of the purchase price to close on the loan (down payment plus lender and 3rd party fees). With that said, take the amount of money you're willing to invest and multiply that by 100, then divide by 30. Example: You have $100,000 to invest x 100 = $10,000,000/ 30 = $333,333 purchasing power.
Does the Property Have to Be Leased?
No, a tenant does not have to be in place on a purchase of a new property. However, don't be surprised when the lender requires 3 to 9 months of PITIA (principal, interest, taxes, and insurance) be held in escrow. Market rent will be used to calculate the DSCR "debt service coverage ratio" on the loan. Market rent is determined by the appraiser in a 1007 rental comp report.
How Long Should You Hold a Property?
The plan is to never sell the property. However, if the property is not cash flowing, it might be time for an exit strategy in order to get rid of it.
How Does a Blanket Loan Work?
A blanket loan is a single mortgage loan that covers multiple properties.
What Are the Qualifications to Get a Blanket Loan on a Portfolio of Properties?
The properties need to be in the same state and like properties. Example: 1 to 4 units can be bundled, but 5+ units would require a separate blanket because it is not in the same category.
How Many Properties are Required to Have a Blanket Loan?
Some lenders allow for only two properties, but most require three or more.
What Is the Minimum Loan Size for Each Property In the Portfolio?
Some lenders allow for a minimum of $50,000 per property.
Can I Access the Equity In the Properties In My Portfolio?
Yes, but only to the extent that the rental income exceeds the new debt service. Private lenders use DSCR "debt service coverage ration" calculations.
What if I Want to Sell One of the Properties Included In the Blanket Loan?
You must structure the loan with a "partial release" clause to allow the selling of one of the properties. Without it, the entire balance of the mortgage is due upon sale.