Rehab, Private, & Hard Money Loans - Basic Strategies and Standard Techniques

Unfortunately everyone thinks their way of buying investment real estate is the best. Well maybe I should say "fortunately" since when real estate is purchased incorrectly by one investor it may represent a substantial opportunity for the next investor.

However, when using rehab, private, or hard money loans to secure your investment real estate one should have some ground rules to make sure the investments is a profitable one.

There are many different basic strategies and standard techniques that most real estate investors use when analyzing properties. Before getting your self into a property, the following basic strategies and standard techniques are used to determine the worthiness of any rehab property.

Stating the obvious and please don't forget this, "Always buy the worst house in the average to above-average neighborhood." This alone keep you out of more trouble than you know.

No matter your exit strategy, which may be to "flip" properties, or to buy, fix, and hold for rental cash flow and tax benefits, and long term appreciation, it's important to be able to attract as many potential buyers, or quality potential tenants, as fast as possible. Keeping this in mind, you should consider properties on streets that are maintained properly and well kept. Believe me, I don't mean you should go to the higher end homes only and limit yourself. What you are looking for is the many subdivisions and what they call, "blue collar" areas where homeowners and tenants alike properly maintain the condition of their yard, property, and neaighborhood in general.

However, a street that has very poorly maintained homes or numerous vacancies do not particularly create a situation for a fast flip for resale and chance are they don't attact quality tenants either. Always remember that this is an investment. You take on a higher than normal risk, and a lots of extra work as a rehab investor. Regardless of how much TLC you give your rehab property, you can do nothing about the condition of your neighbor's property.

So I will say it even if you've heard it many times before, "You make your money when you buy a property, not when you sell it!"

The Purchase and Rehab Equation:

There are many different formulas that can be utilized for the successful purchase of a rehab project. If nothing else it's just plain important that you have one...period. You always need to be where you have a comfortable margin between the purchase price and the eventual resale price of an investment property. This margin will help you reach your goal and purchase a profitable investment, no matter if you have rehab budget overages, or again decide to keep the property for rental purposes and/or longer than you planned. Keeo in mind that every day that the property is not sold or rented comes right off your bottom line which eats away at your profit. The interest, taxes, insurance, and utility bills keep accumulating daliy. If you buy right then you need not fear the many surprises that go along with this business of rehabbing property and protecting your future as well as your investments.

Let's run some numbers using the Purchase and Rehab Equation:

1. Start with an "after repair value" (ARV) for your potential property. (Get your realtor to provide you with comparable sales or CMA report. Choose the property that has a street that is most similar to your house's street, and a floorplan that is closest to your house's floorplan or square footage, and then compare the structure, amount of bedrooms and bathrooms that are all listed on the "comparables sales or CMa report." This will help determine a true realistic market value for your property).
2. Multiply the ARV x .65 (This will give you 65% of the after repair value). Use 55-60% if you are more conservative.
3. Create a comprehensive and complete scope of work or list of repairs that you plan to do to the property, and estimate the costs for each repair. (This is very important. If you have experience and are knowledgeable and experienced in doing rehab work, then maybe you dont' need any help. However, if you are not experienced or skilled with the list of repairs to be completed then please find someone who is and have them put together an action plan and construction budget. Yes, this may cost you a little extra money to get them out there, but realistically this can and will save you thousands of dollars. I know from personal experience).
4. Next, deduct the cost of the repairs from the 65% value of the ARV.
5. If you are hoping to wrap closing costs into your loan, deduct an additional 9-11% of that number.

Voila!! you have just calculated your maximum offer price for this property and that you will pay n omore than this amount for the property! some would consider this a conservative formula, but it usually works well and keep in mind this is already a risky business so there's no need to take on more than you need to. Finally, always remember that anyone can buy a property at close to fair market value (they call those people retail buyers), but with all the costs and risks yo are taking, you must get the best price you possibly can without question!

TVM Funding Group represents many private equity firms, lenders, and investors nationwide.

We welcome any commercial or residential loan scenario nationwide.

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& Hard Money and Rehab Loans for Real Estate Investors

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