Test #1: The 70% Rule

Purchase Price + Rehab Budget <= 70% of After Repair Value (ARV)

Cost: $70,000 + $30,000 = $100,000 ARV: 70% x $150,000 = $105,000

This property meets the 70% Rule as $105,000 is greater than $100,000.

LIQUIDITY Most lenders require a minimum level of liquid assets to approve a loan. Lender guidelines vary in this area, but a good rule of thumb is they typically want to see at least six months’ worth of loan payments, plus 10 percent of the rehab budget and an overall minimum liquidity of $25,000. This amount is over and above any down pay- ment and closing cost associated with the transaction. This also applies to situations where the lender is financ - ing 100 percent of the project cost. Now let’s look at a loan example where an investor can minimize his cash in a deal by following these principals.

Test #2: Experience

3 Rehabs in last 36 months and 2 Current Rentals = 5 Total Experience

The investor meets experience requirements for max loan amount of 90%-100% of cost.

Test #3: FICO Score

Property / Project Profile:

Purchase Price: Rehab Budget: After Repair Value:

$70,000 $30,000 $150,000

Lenders generally use the lowest FICO score of the partners with over 20% ownership in the entity. In our example, 700 FICO would be used for determining loan amount and rates. The investor meets experience requirements for max loan amount of 90%-100% of Cost.

Investor Profile:

Mid-FICO Score: 700

Test #4: Liquidity

(Two partners with 50% ownership each and FICO scores of 720 and 700 respectively.)

3 rehabs in the last 36 months and two current rentals = 5 Total Experience


$40,000 in Business Checking Account

Assume the private lender approves a loan of 90% of Cost and $5,000 in closing costs including lender points, fees, appraisal, and title charges. Additionally, they have a liquidity requirement of 6 months payments + $10% of rehab budget. The approved rate will be 9.00%.

Liquid Assets:

$40,000 in Business Checking Account

28 | think realty magazine :: july 2021

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