Calculations:
Cost = $100,000 ($70,000 Purchase + $30,000 Rehab) Financing 90% of Cost = $90,000, Down Payment = $10,000 Assume a 9% Rate on the short-term rehab loan the monthly interest payment assumption = $90,000 loan x 9% Rate / 12 months = $675/month. 6 months payments = $4,050 10% of rehab budget = $3,000 Total Liquidity requirement = (Costs Brought to Closing) $10,000 down payment + ~$5,000 closing costs (Excess Liquidity) + $4,050 payments + $3,000 10% of budget (Total Required Liquidity) = $22,050 With $40,000 in the Business Checking Account, the investor passes this requirement.
Now let’s analyze the options for whether to flip (sell) this property for a quick profit or turn into a long-term rental.
Cash in the Deal Economics: Rehab Loan Flip Loan amount: $90,000 Down payment: $10,000 Closing costs: $5,000 Insurance: $1,000 Carry costs: $4,050 TOTAL: $20,050
Sale Price: $150,000 Loan Payoff: Selling Expenses:
$90,000
$15,000 (Assuming 10% all-in)
Cost of Financing/Insurance:
$10,050
Net Profit:
$34,950
Flip ROI = $34,950 / $20,050 = 174% BRRRR Loan: Converting to Rental Refinance Loan amount: 75% of ARV ($150,000) = $112,500 Closing costs: $5,000 Escrows: $1,000 Loan payoff: $90,000 (loan #1) Closing/carrying costs/down payment from Loan #1: $20,050 OVERALL CASH IN DEAL AFTER FULL BRRRR: ($3,550 or 2.3% of ARV Value) New PITIA = $805/month Estimated rents = $1,200/month Y1 COC (Cash-On-Cash) return (6 months of cashflow) - $2,370 net cashflow/ $3,550 cash in deal = 66% COC Y2 COC return (12 months cashflow) - $4740 NOI / $3,550 cash in deal = 134% In comparison, if you were to complete this transaction entirely with your own cash, your COC return would be ~12% ($12,400 NOI/100,000 cash input = 12.4% COC
Based on the analysis above, the inves- tor will make a good profit either way, flipping or holding. The lesson here is to build your wealth with OPM and it will take you farther and faster than you could have imagined. •
Damon A. Riehl, Founder and CEO, has 35+ Years of lending experience in a broad array of asset classes, including commercial and residential mortgage, home equity, consumer, small business, and construction lending. Additionally, he has extensive experience in the areas of lending business startups. He has held leadership roles with some of the largest banks and lenders in the world. Some of those include: Head of Commercial Lending for Ocwen Mortgage Servicing, Head of Unsecured Lending for Citibank NA, Global Mortgage Leader for GE Capital, Head of Construction Products at Fannie Mae. Damon has built six de novo lending platforms and is now using that knowledge to build and grow Investment Property Loan Exchange.
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