Financing 1st investment- Hard Money or Private?

Question

First time deal seeker here, looking for BRRRR options in the Washington DC area. For my first deal I'm looking for a single family home needing cosmetic rehab. Because home prices are high this area I won't be able to pay all cash right away. My goal is a purchase for $250k-$350k range (Including rehab costs) in up and coming neighborhoods in the eastern suburbs. My main question is around financing the purchase. I'd like to avoid conventional lending, put 25% down and go with either 1) private/family money or 2) Hard money. Seems like the faster way to close and to stay competitive on good deals.

Since I’m a rookie, would love to hear how you would structure a deal for a private/family member potentially putting up $260k in cash for my deal (75%).  How do you structure a deal to make it enticing for them? Do I approach them like a lender and agree to an interest rate to pay back, based on an amortization schedule?  Or do offer a cash % based on profit after refinancing?

Alternatively, there is the hard money lender in the event my private money friends don't. Any recommendations you have on working with HML on a first deal would be great. For example how much of the purchase/construction price do they typically finance and what do typical repayment terms look like.

Thanks!

Blaine Alger · Answer

@Masud Khan

If you have access to it, I would suggest going the private money (family/friend) route. This option is a little less risky and is more flexible than hard money. However, it will be harder to convince someone to lend you since you have no proven track record.

In terms of structuring the deal, you can go the debt route and just give them a 8-10% return and just pay them out once you refinance. or you could go the equity route and just give them 50% of the deal/cashflow once it is complete.

Each strategy has it own pros/cons, but it just depends on your situation and what you are looking for.

p.s.Check out this post that was made in the forums yesterday. It give you a better idea on how to structure an equity partnership.

https://www.biggerpockets.com/topics/879011

Dan Beaulieu · Answer

@Masud Khan I do flips and brrrr deals both ways...equity and debt. Sometimes both. With debt, you will obviously potentially make a lot

More money, but that comes with higher risk. If you can secure an equity partnership and pay them less than 50% of profits, that may be more enticing for them, but it is riskier for them. For you, it eliminates risk and feels nice and comfortable.

Dan Beaulieu · Answer

@Alex Heidenreich light cosmetic rehab is what 90% of my clients (and me personally) focus on for brrrr. Typically these range from 25-45k...quite a bit of cash to tie up in a property just starting out.

My flipping clients are the ones doing larger gut jobs right now.

Alex Heidenreich · Answer

If you are just looking for a cosmetic rehab, I'm not sure that really falls into the BRRRR category. I would think that a light cosmetic rehab could be handled after a purchase with a conventional loan.

Masud Khan · Answer

@Leo Watts-  that’s right I was just going to use HML for acquisition with the thought of bringing a faster/competitive offer to the seller.  Do you work with investors in the NoVA or PG county areas for these types of deals?

Leo Watts · Answer

@Masud Khan

BRRR doesn’t really work if you’re using hard money. The strategy works if you’re getting a low interest rate loan so your monthly payments are lower and you can cash flow. Unless you’re just talking about the acquisition cost and then you will refinance?

Jeremy Wirths · Answer

Setting up the structure with a family member is flexible. You could do it either way you mentioned or a combination of both. It's whatever you agree upon in regards to terms. Once you decide that you will have an attorney draft up a promissory note with the terms on there. You'll want to do this to protect both of you.

Using HML you'll want to be in and out of the project as soon as you can and not have a lot of holding costs. To my knowledge HML's (at least around me) will charge 10-12% + points.

Masud Khan · Answer

Thanks for the tip @Blaine Alger. That was the ballpark/sanity check I’m looking for. I have a friend who is looking for returns outside of the stock market.  ROIC of 10% could be enticing enough.  Splitting the profit seems like it may not be worth the deal for me.  Would need to run the numbers for sure. Also, thanks for the link— will check out the post!

Masud Khan · Answer

@Jeremy Wirths-  thanks for the info. Those rates are doable for a short period. The real work will be finding an undervalued property that is worth the HML high interest period. My assumptions is that HML will let me close on the property faster. If I end up going with a turnkey buy and hold (not enough deals out there), then I’m thinking I go with a conventional lender.

Financing 1st investment- Hard Money or Private?

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