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Chain Your Loans

Submitted by admin_matt on Mon, 2016-12-05 13:02

Here's an example showing how you can "chain your loans" to provide the down payments for a chain of future deals.

Bob buys a house for $70K with the intention to fix and flip it.  He plans on putting $40K into the rehab and selling it for $200K.  His realtor did a CMA (comparative market analysis) on the house and determined that $200K was a reasonable sale price.  We call that $200K the "ARV" or "after repair value".

Bob knows that NHPL (New Hampshire Private Lending) will lend him 65% of the purchase price ($45.5K to be disbursed at the closing table) and 100% of the $40K estimated rehab costs (to be disbursed in construction draws), for a total of $85.5K, so Bob applies for an $85.5K loan.  In the process of reviewing the loan,  NHPL mentions that Bob could actually borrow up to 65% of the ARV, or $130K, which is $44.5K more than Bob thought he could borrow.  That $44.5K would be distributed after Bob was finished with the rehab and had put the house on the market.

You might wonder why Bob would need that $44.5K, now that the rehab is done and the house is on the market.  Well, Bob is now looking for the next house to flip.  If he finds it before closing on the sale of the first house, he can draw that $44.5K (or as much of it as he needs) for the down payment on the next house.  I call this "chaining your loans".

Is there any downside?  Is it a free lunch for Bob?  Almost.  NHPL loans charge interest only on the outstanding balance, so if Bob never draws that remaining $44.5K, he'll never have to pay interest on it.  And he has no obligation do take that draw.  If he does not take that final draw, then it costs Bob nothing, except for an increase in the loan origination fee.

NHPL typically charges 2 upfront points for loan origination.  If Bob went with is original plan of borrowing $85.5K, then his loan origination fee would have been $1,710.  In the new scenario where Bob borrows $130K, his fee would be $2,600.  So in this example he is paying $890 for the option of borrowing the extra $44.5K.

You will have to run your own numbers to see if this makes sense for your specific deal.

Many of our customers have trouble coming up with their down payments.  If you can find a way to come up with that first down payment you can use this technique of chaining your loans to help with future down payments.

Matt Taylor, matt@privatelendingnh.com, New Hampshire Private Lending