Financing quick flip vs 1year flip?

Discussion in 'Investment Strategy' started by Medusa, 12th Sep, 2020.

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  1. Medusa

    Medusa Well-Known Member

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    Hi Guys,

    Is there a difference in loan structure if I were to buy a cheap reno to flip in 1 month, vs a more expensive 1 year reno flip? Should I tell the bank that my plans are to flip the house, or just get a normal loan possibly IO, with an appraisal on the potential future rent after my reno?

    What kind of structure should I get for say a 300K 1month flip, reno cost 30K
    vs
    1 year flip on a 600K house. Reno cost 150K

    Also how should I manage LVR with my deposit? Do I try maximise the loan say try 90% to use more of my own cash for the renovation? What if I am able to secure the house but not enough cash for the renovation? Should I use equity from my PPOR or perhaps equity from an IP? I have over 100K equity in my PPOR and 80K in 1 IP. 20K in another IP?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    No one will want to lend if you are going to resell. It would be commercial finance.

    Loan structure doesn't matter too much as the loan won't be around long - unless your plan doesn't work and you hold long term.
    You wouldn't wan to be paying LMI on this loan or cross collateralising it.
    Borrow against the main residence for the deposit and 80% against the new property for the rest.
     
    MTR likes this.
  3. Medusa

    Medusa Well-Known Member

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    So are you saying it would be best to look for a normal loan (avoid LMI) then renovate, and in future if I happen to get a decent offer to sell, then so be it?

    What is your opinion on IO vs P&I? My thinking is if it's a fast flip, IO would be the way to go as I would be saving on principal repayments. Possibly P&I for 1yr + hold, hoping the reno and market increases value as well?
     
  4. Morgs

    Morgs Well-Known Member Business Member

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    If a flip is the objective then there isn't much upside in going IO given it'll be sold and you'll return your capital. Higher IO cost will just erode your profit. It is assumed you can afford the P&I repayment with servicing evident via assessment.

    Bank also won't service a loan on "projected rent" after renovation unless you're going down the route of a construction loan which requires plans, build contract, etc. It'd be based on current market rent if it is an investment.

    I would think you want to maximise your LVR% but not push into LMI as again this will just erode your profit. If there is a shortfall you need to look at structuring it appropriately around other equity sources.
     
    Pingu1988 likes this.
  5. Kite

    Kite Member

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    You want to check out the fees when beginning and discharging the mortgage, given they will be relatively more significant than the interest in a 1 month flip situation. P&I vs IO shouldn't make much difference if it's only 1 month