Real estate investors will typically use a short-term or hard money loan to acquire and renovate properties to flip or rent. This type of loan offers quick access to capital and a speedy close, but typically must be paid off within six to nine months. Borrowers flipping the property will pay the short term note off once the home is sold. A borrower with the ultimate goal of renting the property must refinance out of the note. Take-out financing is the term used for a borrower utilizing long-term financing to replace a short-term or hard money loan.
Types of Take-Out Financing
Agency Loans
This type of loan will typically offer the best rate, but the qualification requirements may be too strict for certain real estate investors. An agency loan requires full documentation, which means a borrower will need to meet income, employment, asset, and credit thresholds per Fannie Mae and Freddie Mac guidelines. Refinancing into an LLC is also not allowed. All agency loans must be in an individual’s name.
Portfolio Loans
While portfolio loans will have higher rates and points associated with them, they will offer much more guideline flexibility for the investor. Qualification for these types of loans is often based more on the cash flow of the property and overall credit of the borrower. These loans are typically made by lenders who can make common sense lending decisions based on the specific needs of the borrower. Often, portfolio loans are required to be in the name of an LLC in lieu of an individual.
Blanket Loans
For borrowers with larger portfolios, blanket loans are a great option. This type of financing allows an investors to consolidate multiple mortgages into one note with one servicer. Often the lender will allow individual properties to be included and excluded in the loan offering the borrower a convenient way to manage multiple assets.
Case Study
Bill Smith is a real estate investor. He purchases a single family home for $50,000. The home requires approximately $20,000 in repairs to make it rentable. Bill estimates that his After Repair Value (ARV) will be $100,000.
Bill takes out a loan from a hard money lender for $70,000. This amount is the maximum he can take out because it is 70 percent of the ARV. Bill can have 100 percent of the entire purchase and repair costs financed. The total estimated closing costs are $4,550 or 6.5 percent of the loan.
Once the necessary renovations on the property are complete, Bill can refinance his current short term loan to a 30 year loan. Since Bill’s property is now worth $100,000, he can obtain a loan amount up to $75,000, or 75 percent of the ARV. Bill now has $25,000 in equity on the property and receives an annual cash flow of $3,300. Based on his initial investment of $4,550, Bill now has a 73 percent cash on his cash return.* Bill has successfully utilized take-out financing to refinance out of the hard money loan and maximize cash flow.
*Longhorn Investments is not a licensed originator. The information above is based on assumptions and used as an example. Taxes and insurance will vary by market. Interest rates will fluctuate with the market. Please consult a local, licensed originator for specific loan program details and interest rates.
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ABOUT LONGHORN INVESTMENTS
Longhorn III Investments, LLC is a direct private lender offering short term acquisition and renovation capital to real estate investors for both residential and commercial assets. We operate in major metropolitan areas throughout Texas, Missouri, Indiana, and North Carolina.
Highlights of our loan program include:
– Up to 70% of ARV (after repair value)
– Finance up to 100% of cost
– Close in 3 – 5 business days
– No income requirements
– Streamlined, simple approval process
– No pre-payment penalty
Longhorn was formed in 2008 and has funded over 2,100 loans since inception. Our complementary businesses include a title company and real estate law practice operating out of our corporate office. Our wealth of experience puts us in the unique position of being able to help investors through all aspects of each transaction.
