Blake Yarborough goes over some of the benefits of using a hard money loan and then refinancing afterwards.
Listen in as Blake details this strategy and under what circumstances it makes sense.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Blake: Hello, this is Blake Yarborough with Capital Concepts. I’m today’s host for the REI Classroom. Today we’ll be talking about the benefits of going from a hard money loan to re-fi, and maximizing leverages that way.
Mike: This show is sponsored by passiverental.com.
Blake: First of all, hard money loans, a lot of people have negative connotations or they can’t get past the higher interest rate. You have got to understand that a hard money loan has high rate, high fees, that’s true, but, one, they’re lending short-term, so it may be two, three, four months their money is lent at that higher rate, so it may only cost you a couple of hundred dollars a month net. But they’re lending on properties that typically need repairs that other lenders won’t lend on. The money’s faster, typically close two weeks or less, we need a repair list and an appraisal, and then we can go to closing, clean title.
But in short, taking a hard money loan is still my preferred way of buying houses, and I’ve bought hundreds over the last couple years, few years. I do my hard money loan, I typically get hard money loans at 70% of the fixed up, or after repair, value. So we take a look at this house, say, this ugly house that needs these repairs. Once we have these repairs, it’s worth this new value. We take 70% of that newer value, or that after repair value, and that can fund 100% of the acquisition plus repairs.
So if you hit the numbers right and you buy it at 70% of the after repair value, acquisition plus repairs, then you might be $5,000 out of pocket on a typical hard money loan. Well, once you’ve done the repairs, say, 30-60 days later, you rehabbed it or rent it out, we can go straight into a re-fi. Now, for most people that would mean a Fannie Mae loan. Your typical, conventional loans, today’s rates are in the low fours on a 30-year fixed. So your hard money loan is at 70%, your re-fi is at 75% all the way to your 10th property. There’s no seasoning requirement for a conventional loan, so what we’re doing is we go immediately into that re-fi.
The difference between the 70% and 75% will pay your closing cost for the second loan, and then hopefully you have something near $400 cash flow. So at that point, we’re looking at approximately $5,000 out of pocket, and then we’re cash flowing hopefully $400 a month, well then that starts getting you close to 100% cash-on-cash return. So that’s one of the reasons why I could use a hard money loan to re-fi for myself and my clients because it maximizes leverages, it maximizes my returns. I hope you enjoyed this, thank you.
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