This is one of the most common questions I am asked by borrowers. The short answer is yes, but…
There are many ways to purchase an investment property without using your own money. For instance, you can partner with someone who has the money but not the time to find a property and fix it up. Or you could find a seller with one of those increasingly rare non-qualifying assumable mortgages. You may be able to find a seller who is willing to “owner finance” without a down payment. You can refinance a property you have significant equity in and use the proceeds to fund your investment property. These are all valid strategies but they are seldom what a borrower is asking about when they contact a hard money lender.
The typical scenario I hear is “I found a great deal, can I get a loan?” One of the best things about working for Little City Investments is the answer is almost always yes. We will loan up to 75% of the retail value of a property and we can often lend the repair costs as well. However, the devil is in the details. In order to finance 100% of the cost of a property you have to find and insanely good deal. Let’s look at some numbers. First consider the costs associated with a hard money loan. We charge an origination fee, typically 3% of the loan, a $350 document prep fee that goes to our attorney, and a $399 processing fee. At the time I am writing this post we are in the midst of the Covid-19 pandemic pandemic so we are requiring 3 months of interest paid in advance and 6 months of property tax escrow. In addition to the fees the borrower is also responsible for the title policy, homeowner’s insurance policy (pre-paid for 1 year), survey and closing costs (purchase closing only). Let’s look at an example of what you would need to buy a house with a retail value, also known as an as is value of $200,000 to bring no money to the closing table.
- Retail Value $200,000
- Maximum Loan Amount $150,000 ($200,000 times 75%)
- Origination Fee $4,500 (3% of loan amount)
- Title Policy, Survey, Insurance and Closing Costs $3,000 (estimate)
- Processing Fee $399
- Document Prep Fee $350
- 3 Months Pre-Paid Interest $4,500 (assuming 12% interest)
- 6 Months Property Tax Escrow $3,000 (estimate)
- Maximum No Cash Offer Price $134,251
This example demonstrates that if you are planning to buy a property without paying any cash at closing that you need to offer much less than 75% of value, in this example 67% of value. Keep these numbers in mind when you are negotiating the price of your first or next investment property so there are no surprises when you are getting ready to close the deal.
Little City Investments wants to be your go-to hard money lender. We fund rehab loans across Texas and have offices in Houston and Austin. We do not require you to pay out of pocket as long as the value and/or equity is sufficient! Request a loan today.