Hard money

[Eric Taylor]

Would you use hard money for a buy and hold property?

[Mike H.]

My whole model is based off using hard money for buy and hold.

Here is how I view the benefits.

1) REGULAR PURCHASE WITH YOUR OWN MONEY
A typical deal would be to put down 25 to 30% as a down payment, pay the rehab out of pocket and either be done or try to do a cash out refi to get your money back.

So lets say, you're buying a house for 80k that needs 20k rehab. 25% is 20k, rehab is 20k. You are now out of pocket 40k.  How much does that leave your bank account to show for reserves? If you started with 50k, then you are now down to 10k. How do you qualify for a refi with 10k in the bank? Gets pretty trick.

Secondly, in order to get any of your 40k back out, you need to do a cash out refi. Well, not many banks do cash out refi's once you get over 4 properties. And the few that do tend to have seasoning of 6 mos to a year. 

So what you're looking at is, in a best case scenario, tying up that 40k for 6 mos to a year. And possibly having to struggle to qualify since you would only have 10k in the bank.

2) PURCHASE WITH HARD MONEY

Now, here's where you turn it around and use hard money on the same deal. 

The key is that you can only do this with good deals - i.e. all-in price (purchase plus rehab) needs to be 70% of the ARV or better. So in the example above, lets just say that house that is going to be all in at 100k is actually going to be worth a 145k when you're done.

Here is the value you get from using a hard money lender to do this deal.

Hard money lender allows you get a loan of the full 100k (80k purchase plus 20k rehab). You pay 4 to 5 points on the loan plus closing costs (5 to 6k) out of pocket. Once the rehab is complete, you then go to a bank to do a rate/term refi. Much easier to get. Seasoning requirements much more relaxed as well. 

And, oh by the way, you had 50k in the bank and only spent 5 to 6k on the hard money fees and closing costs so you now have 45k in the bank.  Much easier to qualify for loans when you have 45k in the bank as opposed to 10k as you would under a normal scenario above.

So those would be the reasons I believe hard money is the BEST option for financing buy and hold properties. That being said, I think a big reason for that is if you have limited reserves like I've always had.  For those people that have 100k or more in the bank or maybe for those that are only looking to buy one house a year or every 2 years, then I'd suggest hard money would not make as much sense.  You'd simply be adding costs to the deal for no real problem that needs solving.

But since many of us are looking to grow a little faster than that and likely don't have that much money in the bank, I'm a firm believer that using hard money is the best way to go for many buy and hold investors.