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Updated almost 8 years ago, 02/02/2017
Hard Money to Purchase Rental Property!
Probably not the best unless you have a lender after the rehab is done that you can refinance out with. HM comes at a very high cost and will usually prevent any cash flow. The FHA loan you have may be a good option for now (sounds like you got the whole thing financed) and just look for another property you can cash flow. HM unless paired with a complementary exit strategy is very risky.
There are hard money lenders that offer refinance. You just have to evaluate if the extra money in interest is worth it. In my numbers, because my HML offers 90% LTC it is worth it, because I can buy many more deals. So the 6-12 months of higher interest will pay for itself in more deals. In addition you can add that cost into your numbers calculation and make the deal pay for it.
Hard money does not usually pencil out well for a rental property. Interest rates are high. Repayment time is usually 1 year or less. If you have a deal that does work with hard money interest rates, you may want to look at JVing with someone to get a loan. Part of something is better than 100 percent of nothing. ;-)
Arpan Patel
What do you mean the FHA loan I have now may be a good option? The FHA loan we used was to buy our own personal home that we live in. Can you elaborate more about that?
Alan Grobmeier
The last part of your reply. I am reading that book now!
Christopher Blanco
Thanks for the info, Christopher! I'm new to REI 100% so I wanted some feedback. I might hold off on it. I just don't see how I could buy a property to rent out using hard money and have it paid off within' a year. I guess I could go the refinance route...
@Joey Hampton I wasn't talking about paying it off in one year, well not fully. The refinance into a 30 year mortgage pays it off. Take this example:
Purchase Price: 50000
Rehab: 5000
ARV: 80000
My hardmoney loan (since I am new) loans out at 12% with 3.5 pts ($495 a month interest only). With that I get 90% LTC, I put down $5500. After a seasoning period of 6-12 months, I then refinance for 60000 for 30 years (or whatever I am getting good cashflow at) and go on.
I ran this scenario, and starting with $60K I was able to buy over 40 properties in three years. So even though the hard money was more expensive at first, it gave me the leverage to buy many more properties my first year.
I'm in Charlotte too and I've been looking into Lima One Capital. They offer a hard money loan you can refi out of once rehab is complete. It's a national company, but they have an office in the Ayrsley area of Charlotte.
Christopher Blanco Gotcha. Like I said, I'm new to this so I will have to look more into it, but it sounds like it could work! What do you mean by the pts? I'm not sure what you mean by that, I apologize.
Christopher Hopkins
That sounds like that may work!
All in all, it sounds like I have to find a pretty good deal. The fiancé is just worried about me getting into more debt with this, lol.
@Joey Hampton, if you use them please let me know how it goes. If I come across any others I'll let you know.
Christopher Hopkins I will, for sure. It will probably be a little bit because I'm still reading and stuff before I jump into this, but I will let you know!
I am curious if you decide to use a hard money loan how that works for you, also if you can refinance out let us know how that goes!
@Christopher Hopkins @Joey Hampton I have looked into Lima One pretty extensively, and even got a pre-approval from them. That was standard, they wanted to see all your financial documentation, but I haven't used them yet so I am not sure how they are with closings. They do have a fix to flip program where basically they give you a hard money loan to finance your flip and then roll it into a 30 year amortized loan for the rental property. There were a couple caveats to that program from what I remember though. If you wanted to refinance once the flip was done, they would only allow you to finance 80% of the total project cost. If you let the hard money loan season for 12 months, they would let you refinance at 70% LTV on the property.
I think their hard money rates start around 12% with 3.5 points and rentals rates were 6.5-7%
sorry I misunderstood a bit. I for some reason assumed you house hacked your personal residence. HM does come at high cost and I understand the power of leverage however what often gets overlooked is the risk of having too little capital reserve. Those hard money loans can eat you up if you are not careful and high a big higher of vacancy then you were thinking. If you use HM then your your most sensitive factors will become more sensitive. Furthermore, if you do decide to move all in and you cannot secure as many loans as you hoped to refinance you out after the year then you are again in a bit of a pickle. I'd try and strike a happy medium but please secure a lender on the back end first - at least a verbal okay and then get their opinion as you being to acquire properties to see if they will fund those deals on the back end. If you have that then you have secured your exit strategy and you will be good. HM with not paired with a good exit strategy is a recipe for disaster. I hope that helps and sorry for the misunderstanding.
Christopher Blanco Hi Christopher, I'm a newbie so I don't really understand the concept of using HML at the beginning and then refinance later. Do you mean refinance with a traditional loan? Why don't we using this type of loan at the beginning to avoid the high interest rate from HML? What conditions do we need to be able to get refinance? Thanks!
Vee Vu Most of the time, HM lenders don't require as much as a normal lender would, so you could get approved for the loan quicker and easier without all the hassle..
@Vee Vu Personally there are several reasons why I like HML,
1) closing is fast 3 days to 2 wks.
2) I have a bankruptcy in my past from a divorce in 2011. Big bank lenders won't touch me for at least another 4 years.
3) High leverage. Using the example above with a traditional commercial loan with 25% down, I would only be able buy 3 houses a year instead of 8-10. So while the HML is expensive to begin with I can make that up in volume.
4) Flexible terms, most banks I have talked to won't do a 30 year note on anything less than 100K. My HML doesn't have that restriction. Making a property cash flow on a 15 year note is tough...
5) One last thing I forgot...HML have no issues with, and in fact prefer to close in an LLC. Most banks will not do that.
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There are several hard money lenders out there and each one has their particular quirks. Some want tax returns, some don't care about tax returns, some look at assets at the close and others want you to pay a portion of the rehab at close and they'll hold it in escrow and the list goes on and on. Your plan has to be unique to you and your particular situation, but the one thing that every HML requires is an exit strategy.
Rates should be between 9-12% and 3-4 points on the hard money piece and less on the take out.
PM me for additional details
Stephanie
@Christopher Blanco I see why you use HML now. It helps close the deal quick (less competitors) and high leverage. I thought we only use HML if we don't have enough cash or can't get a traditional loan.