Thread: example of hard money deal with refi

here is an example of how to use hard money to buy and rehab your foreclosure purchases, all the way thru refinancing them to a conventional 30 year loan.

Step 1. Start by setting some cash or income goals for yourself and determining what opportunities are available to you.

Lets assume that you have a desire to increase your net monthly income by at least $1,200 so that you can add more to your monthly savings and investment accounts; your desire is to safely accomplish this through rental real estate.


Based on your research, average rents in your market for 2 bed room units are about $900 a month, taxes are high and insurance rates are reasonable. There are a decent number of foreclosure deals available and a large pool of qualified renters too. With all that info in mind, you have to get at least a duplex to get the $1,200 increase in your net (after expense) income from the property.


Step 2. Find a potential deal based on your goals and what’s available


For this case lets assume that you found a foreclosed, triplex where each unit rents out at $920 a month ($2,760 total), taxes and insurance are $2,100 and $1,200 a year respectively and property management fees are 10% of the gross monthly rent collected ($276 @ $2,760 a month).


The bank is asking $180k for the property, which needs $50k in repairs with an estimated value after all the repairs have been made is around $250k.


Step 3. Evaluate the potential deal to ensure that it gives you the $1,200 needed to achieve your goals and that it makes sense to do it.

Potential Monthly Rents $920 x 3 = $2,760
Less Expenses:
Taxes $2,100 /12 = $175 a month
Insurance $1,200 /12 = $100 a month
Management Fees @10% of rents= $276 a month
Total Monthly Operating Expense $551

Total Net Monthly Operating Income $2,209

Looks pretty good so far. Next we have to deduct the $1,200 from $2,209 leaves $1,009 a month for mortgage only payments, which equates to a conventional 30 year mortgage of about 159k at 6.5% APR (ask a lender to run some number for you).

Step 4. Calculate the numbers to see if the banks asking price makes sense and how to make the purchase price work

The bank is asking $180k for the property, which also needs $50k in repairs, meaning that the total cost would be at least $230k. At this point the deal is not going to work as is based on your goals and abilities.

That being the case you have to negotiate a purchase price of at least $50k below the max loan amount of $159k to ensure that the property is going to give you a net cash flow of at least $1,200 a month.

Step 5. Figure out how you are going to finance the deal


Conventional Bank Lenders

Most Conventional lenders (banks) will only lend a limited amount to you for non owner occupied properties, usually up to a max of about 75% of the purchase price; with the repair costs being absorbed by you.

That really sucks.

The better way to buy and rehab investment properties is with a hard money investor loan

Hard Money Lenders

Hard Money Lenders on the other hand, try to make it a lot easier for you to get things done.

Terms usually are a bit higher than banks for interest rates and origination fees, and term financing period will be shorter, in most cases 6 to 12 months max with some exceptions for certain situations. Most will lend a max of 65% of the total after repaired value of the property to qualified borrowers for the purchase and repair of single and multifamily homes that the investor will not be living in.

Step 6: Do the math for your hard money loan

Assuming that you can get the bank to accept your offer of $100k for the property, and if you qualify, the hard money lender may be able to provide financing that covers 100% of the purchase price and 100% of the total rehab costs, just as long as it fits within 65% of the value of the property after all repairs have been made, at a rate of between 9 and 18%.

So in our case where your lenders' appraiser gave an after repair value of $250k, the max the hard money lender could provide is $163k($250k x 65%), which would more than cover the purchase price of $100k and the Repairs of $50k. There would other costs involved with closing the loan, such attorney fees, appraisals, insurance, taxes and origination fees that would affect the total amount provided.


If you borrow $150k at 9% interest only rate, your monthly payment would be about 1,050 a month, excluding other rolled in costs, such as points and origination fees.


The term on this loan would probably be somewhere in the 6 to 12 month range, after which you would have to either have sold the property or refinanced it via another lender. You would also have to take into consideration the hard money-lender’s origination fees of about 5%, underwriting, attorney fees, appraisals and other expenses.

Of course you have to balance the total hard money borrowed with the terms you’ll get on your refinance to make sure that your goal of netting at least $1,200 a month is reached.


Step 7: Get the terms of your refinancing to ensure that your numbers will work


Once the rehab work is completed and after you have held title on the property long enough to satisfy a conventional lenders qualification terms, you may be able to refinance up to 80% of the newly appraised value of the property.


In this case, you’ll want to make sure that your new loan does not exceed $159k and that the interest rate does not exceed 6.5% APR so that you can start earning the $1,200 a month in net income desired.


Step 8: Get pre-qualified for a hard money loan

The hard money lender should use the same criteria for credit as a conventional lender does. On approval, you’ll have a clear idea of what is actually possible for you. TO get started, you will usually need to show the following:


Brief bio of you, which indicates the level of experience that you have and a plan of action for the property

recent bank statements

recent paycheck stubs

tax returns

Personal financial statement

List of properties that you already own. Include rental income and expenses, plus copy of leases.

Credit report (lender will pull)


If you already have a deal negotiated, you’ll also need to show:

Signed contract

Detailed repair list with cost

Your proposed exit from the deal, either resale or refinance

Contractor contact info


Other info will be needed as questions will arise, so please be prepared to answer them


Step 9: Negotiate your deal


Using the number you need to make the deal work, contact the seller and stay engaged til you are able to seal the deal via a signed contract for purchase. Start the negotiations with an amount that is well under the max that you can borrow for purchase and repairs so that you don’t have to come out of pocket. That being the case, I would target $100k as the max purchase price and begin negotiations at around 85% of that ($85k).


Keep going back and forth on the negotiations til you get a price that works for you, just as long as it doesn’t exceed your target price. Once you have the signed contract, submit the contract and other info needed to the lender for processing.


Step 10: Close the sale and begin the rehab work. Once the repairs are completed, you may consider working with a Realtor or professional property management company that was referred to you to assist in renting the property out (or reselling it if desired).


Step 11:Contact your conventional lender to begin the process of refinancing the property out. You will more than likely need to provide them with the same updated info that you submitted to the hard money lender. Let the lender know of all loans against the property as well as the terms you desire.


The lender should be able to roll into the loan the closing cost and other expenses into the loan, which will increase the loan amount above your payoff amount. The result however should be that you have no out of pocket expense except the cost of your appraisal and credit reports.


Step 12: Repeat the process on the next property ASAP.


Recap Working Backwards To Get Desired Net Monthly Income Of $1,200


a. Potential Monthly Rents $920 x 3 units = $2,760

b. Less Monthly Principal & Interest Payment-$1,009

c. Less Monthly Taxes $2,100 /12 = -$175

d. Less Insurance $1,200 /12 = -$100

e. Less Management Fees 10% x $2,760 Gross Rents = -$276

Total Net Monthly Income $1,200


Refinanced To Conventional Loan

30-year conventional mortgage, which refinanced the hard money loan and rolled in the closing costs, origination fees and other expenses at 64% of appraised value = $159,000

Monthly Principal & Interest Payment on a 30-year mortgage, 6.5% interest rate loan on $159,000 at 64% of appraised value = $1,009


Buying & Rehabbing The Foreclosed Property With Hard Money Loan

a. Purchase Price = $90,000

b. Repair Costs = $50,000

c. Cushion For Closing Costs, Origination fees and other expenses = $10,000

Total Loan On Purchase and Repairs = $150,000


Monthly Hard Money loan payment @ $150k X 9% / 12 = $1,125


After Repaired Value Of Property = $250,000

Max Hard Loan @ 65% Of After Repaired Value = $163,000


Hopefully this helps to explain the situation better. Good luck..