Doing the Math: How to Price Out a Fix-and-Flip Loan Kiavi case study underscores importance of “doing the math” on the cost of a loan.
Article Provided by Kiavi
I n the current market environ - ment, it’s more important than ever for real estate investors to build trustworthy relationships with lend - ers to diversify their capital sources. Most of the questions Kiavi custom - ers ask in our space are related to pricing. What is the current interest rate? What are your closing fees? What is the best rate you can offer? Although these questions are often top of mind for real estate investors, there are several other factors involved when it comes to pricing out a loan. For example, the interest rate, origination fee, service fee, and leverage are all important. Understanding each element is essential to understanding the loan’s cost, which is helpful when com - paring offers from several lenders. There are many ways to structure a fix-and-flip/bridge loan to help real estate investors maximize their prof - its. With the previous factors in mind, let’s consider an example based on a recent customer interaction that demonstrates pricing in action. The customer wanted to hold a property for five months to complete the rehab project and needed the lowest-cost option available. Another lender offered a rate of 8.99% at 90% all-in, nearly two points less than Kiavi’s rate at the time,
interest rate offering at “90% all-in.” Although the lower interest rate from the competing lender seemed great on the surface, when we dig deeper to understand the fundamental nature of the offering, Kiavi’s offered a better cash-on-cash return. Several features make up a loan’s pricing. When considering different offerings from lenders, a real estate investor must examine each part separately to see which has the lowest complete loan cost. It’s all a numbers game, and math doesn’t lie. Shopping your financial options and running scenarios by calculating the math behind each will give you the answers you need to make the best decision. • With more than $12.3 billion in funded loans, Kiavi is one of the nation’s largest private lenders to residential real estate investors (REIs). We harness the power of data and technology to offer REIs a simpler, more reliable, and faster way to access the capital they need to scale their businesses. Formerly known as LendingHome, we’re committed to helping our customers revitalize the approximately $25 trillion worth of aged U.S. housing stock to provide move-in ready homes and rental housing for millions of Americans across the country. NMLS ID #1125207
which was 10.75% at 90% LTC. So, what’s the difference for the real estate investor in this scenario? Let’s look at the math. Kiavi Loan Offering: • Loan amount: $316,500 (90% LTC @ 10.75%) • Purchase: $256,500 • Rehab: $60,000 • Origination: $3,165 (1%) • Service fee: $999 • Down payment: $28,500 • Interest carry: $14,177 Total Costs: $46,841 Competitor Loan Offering: • Loan amount: $310,500 (85% LTC @ 8.99%) • Purchase: $250,000 • Rehab: $60,000 • Origination: $3,105 (1%) • Service fee: $999 • Down payment: $34,500 • Interest carry: $11,631 Total Costs: $50,235 Using the example above, we can see that this customer would be spending an additional $3,394 if they chose to go with the lower
46 :: INVESTOR REVIEW :: JUL-AUG 2023
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