BRRRR - Hard Money to a conventional loan

[Ben Manna]

Hi all,

First-time poster, here. I am new to the real estate world after buying my first property with my older brother earlier this year. It is a duplex that we bought via an FHA loan since my brother is living in one unit and we are renting the other unit out. We didn't have much money for a down payment so an FHA loan really helped us get our first property under our belt. The place was a bit of a fixer-upper (more specifically the upstairs unit) which was fine since my brother would be living in that unit and it gave us the time to give it the TLC it needed. We replaced the carpets (the previous tenant had lived there for years with cats - the place stunk of cat pee), painted everything from the ceiling to the baseboards, new laminate floors in the kitchen and hallways, and new light fixtures throughout the unit as well as a new toilet.

After going through that rehab ourselves it got us thinking about pursuing a real BRRR method for our next property. Finding something that needs some serious love, perhaps more than just flooring and paint, a legit distressed property or foreclosure, and doing a full rehab to either flip or hold and rent out with some built-in sweat equity. However, again we don't have much money to put down for our next place so are considering a few options that I was hoping I could get some advice on from this forum.

1.) Pool together the money we both have saved up (we would likely do this in another 12 months) and combine that with a cashout refi or home equity loan from our first rental (if we have enough equity built up in the property from the work we put into my brother's unit earlier this year) to come up with the down payment and rehab costs.

2.) Look into a hard money lender to finance the purchase and rehab of our next property - This is really what made me write this post and where I have the most questions.

1. a.) Do hard money lenders finance both the full purchase price plus rehab costs? If so do any of them do it for no money down? If not what kind of down payment are we looking at?
2. b.) Let's say we are able to secure hard money financing with no money down - wouldn't we still need to come up with 20% of the ARV in order to secure a conventional loan and pay off the original hard money loan? - this is perhaps the biggest question that I would like help with. Basically, how do you turn around and acquire another loan to get you out of the hard money debt with the big interest payments each month?
3. c.) After the hard money loan would we be able to use an FHA loan to pay off the hard money or is conventional the only way here?

Thanks in advance and look forward to hearing from you guys. Happy Holidays!

[Caroline Gerardo]

Buying with hard money is short term and expensive. What you can get depends on your FICO, cash, income, property type you plan to buy, and what you are doing with current duplex.

Hard money purchase with no income/ no good credit/ you can typically borrow 70% of what it will be worth. Lots of improvements do not have cash value equal to the cost to complete. Comparable properties are what matter- what are mirror duplexes selling for with loans in your area last month? The rates are higher than 10 and have upfront costs and prepayment penalties maybe of 3+ percent. You need an exit strategy - if the plan is to refinance into a conventional loan when the work is done you need income on taxes, good credit, and property in good shape. Loan to value you can get depends on number of units and if you occupy. Hard money has traditionally been non owner occupied so mixing in an exit plan to refinance owner occupied conventional will take paperwork in advance.

There are lenders who are softer money that specialize in fix and flip which you have to show you can complete the project quick and there will be equity when complete. Rates for these in the 5's with two points and costs generally no prepay.

FHA/Conventional To refinance FHA your brother maybe can't do a second one in short period of time in same neighborhood. This really depends on the equity in the duplex you have. If you have equity you could refinance that NON owner occupied and then purchase another property FHA. It has to make sense and be true. Do you have the income or credit to buy FHA on this second property? I can't answer that without fifty more questions.

Your answer is there are options. Too many ins and outs to write here. You need a plan and a lender who helps guide the approvals and provides letters if you choose to go hard money. I don't do hard money but can give you names. From there you need a notebook to keep what is offered straight, and it changes as days pass...

You need to know: both your middle FICO s, both current w-2 income, income you show for rental on IRS return, what is value of the duplex (lender can run a free AVM and give you a range), how much is owed on the FHA loan, vesting, are either of you married? , long term plans...