The Avid Rehabber Financing
The Avid Rehabber
Financing a rehab can be very costly and determining those costs is a very important step in analyzing the deal to know your potential profit. I will discuss the steps and how to format a construction deal analyzer in my next blog but for now let’s see what you can do for the financing. When you find a house that is priced under market value (due to needed repairs), the house cost, plus repairs, attorney fees, insurance, taxes utilities and realtor fees will equal the amount of financing that will need to be acquired. Below are different ways to find the financing:
- Finance the costs out of your own pocket. This is certainly an option but if you are doing house revitalization full time you may have many projects going at the same time and will need additional sources for funding.
- Private Money Lender (PML). This is by far our favorite approach and we have used it on all of our rehabs. There are many PML’s that are willing to lend money at 12% because you structure the deal by securing the loan by a note and mortgage on the property that the PML holds until the property sells. A PML often times uses money out of a self directed IRA to make a larger interest rate than the current market pays (typically 1-5%).
- Hard Money Lender (HML). These lenders are easy to find but hard to deal with. They will require a lot of personal and business information, very detailed deal information including a breakdown of construction costs with the release of funds on determined time lines which contractors hate. Cost of funds from HML’s can be less than a PML but watch out for hidden fees that will be charged up front and will have to come out of your own pocket. It may appear that the HML fees of 4-7% is less than a PML but with up front points, administration fees and all the paperwork involved it is much more work for you in the long run than procuring a PML. We do use our bank as a HML for our buy-hold passive income properties with great success but they still require an annual business and personal financial statement from us (we cringe when that time rolls around).
- Aunt Sara has a ton of money to give you for free to do a deal, come on folks give her 12% return and use here again and again as you personal Private Money Lender.
If you are buying a home for yourself and want to use us as your Realtor a very important step in the home-buying process is to get pre-qualified for a mortgage - This will give us an idea of the price range that you can afford so that we can go out and find the best deal on a home that is right for you. A very good mortgage lender with my personal recommendation is Prosperity Home Mortgage.
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