Borrowing and Exiting A Professional Lender – A Case Study
Let me use an example of an investor we will call Rob. He is a great wholesaler, and an all round good guy. But Rob decides to keep this property himself, but financing can be a bit of a challange for him, as he only has 50,ooo in a secured line of credit to work with. There are other costs to consider(Taxes, Insurance etc), but I’m going to keep the numbers simple for now.
Rob finds a detached house that he can make into a legal duplex in Oshawa, which he can purchase privately for $260,000. The property as it sits today is worth $310,000. After he does his $20,000 and 2 month renovation, he estimates that the property will be worth $340,000. Rob also likes to underestimate his after repair value of properties. He also is conservative and will add an extra month to the time it takes him to do the renovation, in order to account for the length of time it will take to refinance the property. We are going to assume that this property cash flow’s well and would be great to add to his portfolio at the after repair value.
He is able to get an interest only mortgage with the a professional lender for 10% at 80% loan to value of the appraised value. So he will get 80% of $305,000 or another words a $248,000 first mortgage. He will need to come up with $12,000 for the downpayment. There is also a lender fee of 2% on the total mortgage. The lender will allow him to sell or refinance without any penalty. There will also be $3,000 in closing costs such as lawyer fees, land transfer costs etc.
Rob’s final appraised value after all the renovations is $345,000.
Exit Strategy 1 – Hold The Property
Let’s look at the numbers:
The first Mortgage is $248,000 x 10% = 24,800/12 = $2066.67 per month Lender Fee of $4,950
Downpayment Required Out of Pocket: $12,000(Downpayment) + $4950(Lender fee) +$3000(Closing Costs) = $19,960
3 Month Renovations: $20,000 + 6200.01 (3x$2066.67 is the cost of financing) = $26,200.01
Rob is into the property for:
248,000 (First Mortgage)+$19,960 (Downpayment + Lending Fees) + $26,200.01 (Renos and Holding) =
$294,160.01
The new mortgage he gets with a traditional lender will be at 80% of the new appraised value.
$276,000 since he is into the property for $294,160.01 =
$18,160.01 left in the deal and cash flows well
Exit Strategy 2 – Flip The Property
We established that Rob is into the property for:
248,000 (First Mortgage)+$19,960 (Downpayment + Lending Fees) + $26,200.01 (Renos and Holding) = $294,160.01
If he sells it a tight fast moving market, he can probably get the property closed in 60 days and would need to pay 5% Realtor fees and closing costs. If he sells the property privately and directly to another investor, he could make more money by saving on Realtor fees.
$2066.67(Add 1 month of financing )+ $19492.5(5%+hst of $345,000) + $1000(Selling Costs) = $22,559.17
So Rob would make $28,280.82 (Just be careful that you structure this properly of you will be taxed as active income)
Exit Strategy 3 – Sell After Renovations to Joint Venture Partner
We will talk about Joint Venture partners in more detail later in this course, and more specifically this strategy in the Funding Your Properties – Joint Venture Partnerships. For now lets say you bring on a partner that has 50% ownership, and you sell them the property at $345,000. You maintain 50% ownership of the property. (Talk to your accounant about tax implications)
The joint venture partner comes into the deal once the project has been completed at 20% of the new appraised value of $345,000. This would be $69,000.
Since Rob has $18,160.01 left in the property after the refinance and recieves $69,000 for the joint venture partner. He owns 50% of the property, and also pockets $50,839.99 after he gets back the money that was left in the property.
Here’s is one property that I would like you to brainstorm on. Come up with 3 different exit plans with the same property. An exit plan, can include an exit into a long term hold. As a common practice, you should do this with all properties before you purchase it, until you can do this in your head.
- Detached house in Whitby Purchase Price $305,000.
- Renovations $50,000 to add a legal Basement Suite.
- Financing, Holding and Closing Costs $5,000
- Refinanced Value: $430,000
- Rents $1350 + Utilities Upstairs and $1100 + Utlities Downstairs