First-time Investors. Strategy, Hard Money, Pitfalls, Advice?

[Jonathan Blocker]

Hi BP,

This post is sort of a long one. Any response to any of the questions is much appreciated. Feel free to ask for any clarification. This is my first discussion post as an investor and plan on using the advice you give me here as a springboard for future discussions.

My wife and I are first-time investors looking to house hack a multifamily (2-4 units) property in Tallahassee, FL. We currently live in St. Petersburg, FL, but want to move to Tallahassee to be closer to family. Our initial strategy was to purchase a property and use an FHA 203K loan to fund most of the purchase and rehab cost. Our broker is sending us MLS deals, but we've realized that most of these deals aren't really deals at all.

Now, we are looking for off market properties. We have $60k set aside for a purchase/rehab and just started looking for hard money to fund the rest. So, a 203k loan is off the table for now.

Here's our new basic strategy: 

1. Purchase an off market property at a discount (duh) using our cash and hard money 
2. Rehab (Using a contractor) with our cash and hard money to force appreciation  
3. Cash out refinance, pay back hard money and initial cash investment 
4. Live in one unit and rent out the rest 
5. Repeat.

Specific Questions:

1. If you have invested in Tallahassee yourself, what are the challenges? What are the opportunities?
2. Since we’ll be living in one of the units, are there refinancing opportunities that are available to us that aren’t available to NOO investors? Flip it, are there challenges specific to refinancing owner occupied investment property?
3. Do you see flaws in our strategy?

General Questions:

1. In your opinion, what are some issues investors should look out for on their first deal?
2. Any advice for first-time investors wanting to use hard money?
3. What questions should we be asking, but haven't?

As first-time investors, any advice or constructive criticism is welcome and appreciated.

Thanks in advance BP,

-Jonathan Blocker

[Cara Lonsdale]

You have outlined a very smart strategy, which is VERY important for any investor to do when they start.  Come up with a plan, then work it through to any possible outcome, and work each outcome.  Smart.

Here are some things that jumped out at me when reading your post.....

First, hard money lenders will not lend on any property you will occupy.  They require the opposite.  You will need to certify that you will NOT occupy the property.  So, IF you intended to occupy the home, you would need to refinance through traditional means first, then move in.  

Second, make sure you account for the holding costs in your rehab budget.  Many investors forget to do this.  With such high interest rates offered by hard money lenders, the monthly, interest only loan payment will add up, depending on how many months you hold the property.  So make sure to include this in your budgeting, AND your comparisons between an on-market property you can buy with traditional lending VS an off-market property you can buy with hard money lending.  You may find that they are closer than you think.  MAYBE....so it's good to compare.

Lastly, make sure that your end game is a realistic outcome. Every investor goes in with the BRRRR mentality, but work through the numbers to determine IF your loan will be able to be refinanced and all money invested can be recaptured. Many times, the down payment AND rehab expenses take the total investment higher than the traditional 80% LTV mark that lenders will need for a refinance. IF you can find a deal that has an acquisition +rehab+Holding costs that equate to less than 80% of the ARV, then you TRULY have a good deal on your hands. And those will be rare finds.

I hope that helps further your discussion, and the process for starting your investment journey.  Best of luck to you!