Conventional Loan vs. Hard Money

[Dallas Thomson]

Hello Bigger Pockets Community!

I'm looking for some advice on the type of loan I should use for my first buy-and-hold rental. I've saved up a chunk of funds, maximized my credit score, and paid off a substantial amount of debit so I'm ready to purchase now. I would like to go with the BRRRR method, but only with a light rehab (something I've been calling a 'lipstick rehab' = new flooring, paint, kitchen counters/cabinets, appliances etc). Once I gain more experience and have more free time I'd feel comfortable with a more substantial rehab.

Here is my research so far...

Conventional Loan: I have been pre-approved for 550K through a local credit union, Community One. That is more than I need; most SFH in my area that are good for rentals run between $275K-$350K. But I obviously need to put 20% down ($55K to $70K) plus closing costs. I have the money for the down payment and closing costs in that range, but that would deplete almost all of my available cash. I am nervous of being 'cash-poor', especially if I have to cover vacancies in the first few months. This will leave no funds for me to rehab so it would have to be a turn-key rental, effectively taking out one of the R's in the BRRRR. I want to make sure I am maximizing the investment potential of my available cash and wonder if it's wise to have it all tied up in one rental. Going this route, I assuming it would be a while before I could refi to pull out enough money for a down-payment for a second investment property.

Hard Money: I've been exploring hard money loans and have found a handful of reliable lenders in my area. An example of a hard money loan in my area - 12-month loan, 12% interest rate (1% per month), no early pay off penalty, and 2% loan fee - they're willing to loan up to 90% LTV (but I'm assuming the 90% is for experienced investors so I'm expecting closer to 70% to 75% LTV). The biggest perk of Hard Money is the ability to finance rehab. I'm assuming to make this feasible I'd have to stay true to the 70% Rule, but I'm unsure this will work in my area which is West Puget Sound WA (prices are still a bit nuts in some areas, but not everywhere). I would start looking to refi after about 6 to 7 months, which in theory would give me a chunk of cash to roll into another BRRR. Going this route, I'm nervous I would run into trouble refinancing if the economy tanks too much over the next year due to COVID. I know it's going to tank, but will it affect my ability to refi (assuming my finances stay the same of course)?

I would love to hear any thoughts folks might have on which direction I should go with financing. Are there PROS and CONS I haven't considered? I'd also love any recommendations on potential lenders, especially hard money lenders. What should I look out for to make sure I don't fall victim to any predatory lending?

Thanks for reading! I appreciate your time!

Dallas T