Often, people will find a property that’s a great deal, but because so much work is needed on the home, it’s hard to pull the deal together financially. If rental property financing is an issue, there may be a way to overcome the problem. Today, we’re talking to Cary Donham with Capital Concepts. They provide rehab loans for distressed properties through hard money lending.
Hard Money Rehab Loans
When you find a property that’s in disrepair and can’t be sold on the open market due to its condition, an investor will buy it at a steep discount. Typically, those properties do not qualify for traditional financing, whether it’s a conventional mortgage or even a portfolio loan. So, we have to come up with interim financing to bring that property into a condition where it will meet the guidelines for a normal loan. Those loans are called hard money rehab loans.
How Do Hard Money Loans Work?
Many people see hard money loans as risky and scary, but it’s important to let every transaction stand on its own merits. We wouldn’t use hard money for every transaction, but there’s a process to determine whether this type of loan would save you money. If you’re buying a house for $50,000, and you’re making $20,000 of repairs, your hard cost is $70,000. The repaired value of the home could be $100,000, and on a hard money loan, you can borrow on the after-rehab value, not the purchase price. So, you could get up to 70 percent, which is $70,000, and in that case, you would only bring closing costs to the table.
Achieving a Higher Yield with Hard Money
Here’s an example. I purchased a distressed property that was worth $80,000 or $90,000. It needed a lot of rehab, so I used hard money to finance the purchase and the rehab costs. With that deal, I only brought $5,000 to the table to close the loan. The property got fixed up, and I refinanced into a traditional Fannie Mae/Freddie Mac mortgage, and got cash back at closing. So, I have more equity in the deal that what I owe. This property makes more per year on cash flow than my out-of-pocket was when I purchased it. I would not have been able to do this if I didn’t use hard money. I would have had to pay the $15,000 in rehab costs, and put about 20 percent down. That would have been a cost of $20,000 or $30,000 instead of $5,000. Now, I get a cash on cash return that’s more than 100 percent. You can’t do that with a traditional mortgage. So, hard money can make your yield much higher than a traditional loan.
If you have any questions about Fort Worth property management or how to finance a deal like this, please contact us at McCaw Property Management, or we can put you in touch with Cary from Capital Concepts.