Read our previous blog post on this real estate investor’s questions 1 and 2
Question 3) Am I better off obtaining a Conventional loan from the beginning or is it best to get a Private Money Loan first and then convert it to a Conventional loan once the property renovations are complete and the property is leased?
Let’s look at the numbers and determine our answer, specifically the amount of money you bring to closing and the amount of money you are left with for your next investment properties.
Before we analyze these options lets take a look at the general numbers which will be explained below.
| Option 1 – Conventional Only | Option 2 – Private Money + Conventional | |
| Number of Loan Transactions | 1 | 2 |
| Closing Costs | $3,000 – $4,500 | $11,000 – $12,500 |
| Total Money Invested Out of Pocket | $40,000 | $11,250 – $15,000 |
| Final Loan Amount | $120,000 | $157,000ish |
| Monthly Cash Flow | +$175ish | -$175ish |
| Total Money Invested Out of Pocket | $40,000 | $11,250 – $15,000 |
| Money Remaining for Future Acquisitions | $60,000 | $85,000 – $88,750 |
Option 1 – Conventional Loan Only, No initial Private or Hard Money Financing
Purchase Price = $150,000
Minor Renovations = $7,000
After Repair Value = $205,000
Upside(s) – There are less closing costs as there is only one loan transaction and a lower monthly payment as your down payment decreases your initial loan amount.
Downside(s) – 15%+ down payments (typically 20%) are required for investment financing and renovations and/or repairs cannot be included within your Conventional loan.
Important Note: Conventional financing does not allow you to factor the future value of the property for loan qualifying purposes.
In this example, Conventional financing would offer you financing of $120,000 with a $30,000 down payment of the $150,000 purchase. Factor in the aforementioned $3,000 estimated closing costs and $7,000 in minor renovations and your total out of pocket monies for this property are $40,000.
| Purchase Price | $150,000 |
| Down Payment | $30,000 |
| Closing Costs | $3,000 |
| Minor Renovations | $7,000 |
| Final Loan Amount | $120,000 |
| Total Money Invested | $40,000 |
Option 1 provides you lower total closing costs as there is only one transaction being completed and lower monthly payments as your loan amount is lowered to $120,000 and in return all it costs you is about $40,000. So if you had $100,000 before buying this investment property, you are now left with $60,000. Remember this number when comparing Option 1 and Option 2.
Option 2 – Private or Hard Money Financing 1st, then refinance to a long term Conventional Loan (once renovations are complete)
Purchase Price = $150,000
Minor Renovations = $7,000
After Repair Value = $205,000
Upside(s) – Using other people’s money and conserve your capital by leveraging it to borrow other money.
Downside(s) – Two transactions = almost double the closing costs and amount of times you sign your name at closing(s).
Important Note: Private and Hard Money financing does allow you to factor the future value of the property for loan qualifying purposes.
In this example, Private and/or Hard Money financing would offer you financing of up to 70% or 75% LTV (loan to value) of the future value of the property, commonly referred to as ARV (After Repair Value). Traditionally Private and/or Hard Money Lenders limit you to 70% of the ARV, however in some instances and with select lenders (Blink Lending being one) you are able to borrow up to 75% of the ARV. In your case, you are extremely qualified and therefore qualify for 75% LTV financing.
Let’s take a closer look at the numbers and see what’s available to you. (We encourage you to use this quick formula going forward when analyzing potential investment deals.)
| Money You Need | Money You Can Get |
| Purchase Money = $150,000 | 75% of After Repair Value (ARV) |
| Rehab Money = $7,000 | ARV = $205,000 |
| Estimated Closing Costs = $8,000 | 75% of ARV = $153,750 |
| Total Money You Need* = $165,000 | Total Money You Can Get* = $153,750 |
*The difference between Money You Need and Money You Can Get equals = Your Money To Closing
In this example you need $165,000 and are able to borrow $153,750 leaving the difference of $11,250 as your skin-in-the-game or money to closing. Within the $11,250 you are bringing to closing you have access to the $7,000 in your rehab budget, which is available to you as a reimbursement once you have completed said repairs.
Once the rehab and renovations are complete you are now eligible to refinance your Private and/or Hard Money Loan into a long term Conventional loan up to 80% LTV and at much more attractive terms increasing your rental income and therefore monthly cash flow.
Although Conventional investment financing does not allow real estate investors cash out equity loans up to 80% LTV (max cash out LTV is 75%), real estate investors are able to include closing costs and/or escrows (including property taxes and home owners insurance within the monthly mortgage payment) within their new loan amount.
Although Option 2’s closing costs are higher (two loan transactions versus one), Option 2 allows you to leverage and borrow more money which in turn keeps you more liquid to acquire additional properties and further expand your real estate portfolio. So with the same $100,000 you had before buying this investment property, you are now left over with $88,750 minus carrying costs during the rehab and refinance process.
Only you can answer which option is best for you, as it is dependent on both actual transaction and your overall long investment strategy on a case-by-case basis.
Do you prefer Option 1 or Option 2? Our expert team at Blink Lending Investments is here to answer your questions and play your particular scenario out with you. This is not meant to be a one-stop shop for any of our Houston real estate investors, so call or email us today.
