Bridge at 10 percent plus two points, does the carry eat the whole recycle?

Question

Working through a term sheet a private lender sent me for a bridge-to-DSCR setup and I want to check my arithmetic against how people who actually hold these things think about it.

Deal as presented: purchase 145k, rehab 40k, so 185k of hard cost. Bridge is interest only at 10 percent, 2 points in, 1 percent exit fee, six month term. Funds 85 percent of purchase and 100 percent of rehab in draws. ARV opinion is 250k, refi assumed at 75 percent, so 187,500 gross.

If I average maybe 150k drawn over six months, that's about 7,500 of interest, plus roughly 3,700 of points on the way in and 1,875 on the way out, plus title and legal twice. Call the round trip 15k of pure financing cost. So against 187,500 of refi proceeds I'm carrying 185k of hard cost plus 15k of friction, and the recycle is already short before I get to holding costs during lease-up.

My question is how a long-hold investor treats that 15k. Does it just get accepted as the price of the acquisition and forgotten once the property is stabilized, or does it come off the return you quote yourself on the rental? And I'll admit the thing I keep circling back to is that the lender in this structure is clearing something like 14 to 15 percent annualized with a first position and no tenant risk, which looks like a better seat than mine.

Rena Expert · Accepted Answer

Your 15k is roughly right in shape, and it lands in your basis rather than disappearing. The part of the math that usually breaks first isn't the 75 percent, though. It's coverage.

Run it. A 187,500 loan at 7.5 percent on thirty years is about 1,310 a month of principal and interest. Add taxes and insurance of, say, 400 and you're at 1,710 of debt service. A DSCR lender pricing that deal at 1.20 coverage needs about 2,050 in rent. If the house rents for 1,850 you're at 1.08, and the lender doesn't decline you, it shrinks the loan until coverage works. That can knock 20k or more off proceeds, which is a bigger hole than your entire financing friction. So the number to solve for before you sign the bridge is the rent, not the ARV. The 250k opinion also has to survive an appraiser who isn't the one your bridge lender used.

On the carry itself: it goes into what you have invested, so it shows up as a permanently lower cash-on-cash on the rental for as long as you hold. Whether any of it capitalizes for tax purposes is a question for your CPA, and treatment varies.

The risk you haven't priced is time. Six month bridges get extended, extensions carry a fee and sometimes a rate bump, and most DSCR lenders want an executed lease in hand at closing. A four week gap between certificate of occupancy and a signed tenant is another month of 10 percent money plus an extension. Get the extension terms and the coverage ratio in writing from both lenders before you commit, because those two numbers decide the deal.

karen_whitfield · Answer

I stopped underwriting to a full recycle a while back. If I'm holding a house for fifteen years, leaving 20k in it at the refi is annoying for the next purchase and almost irrelevant to the outcome. What I won't do is leave the 20k in AND take a loan sized so tight that a water heater and a vacant month put me negative. The equity can sit. The coverage can't.

angela_burke · Answer

The six months is where I'd push back on that term sheet. My crews slip on permit inspections constantly, and a two week delay on a rough-in sign-off isn't unusual. On 150k drawn, every extra month is about 1,250 out the door plus whatever the extension costs. If your bridge lender won't quote the extension fee now, assume it's a point.

On the lender-seat question, orchard is right that the appreciation and the rent growth land on your side of that trade, not theirs.

kevin_lombard · Answer

The exit fee sent me back to the term sheet, since I thought points only got charged when the loan started. So you pay to leave too. That changes how I read every one of these spreadsheets.

Bridge at 10 percent plus two points, does the carry eat the whole recycle?

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