1st Buy Sweet Spot : HML vs. CC vs. Cash vs. Traditional Financing...

[David A.]

So I am currently not in the game (abroad in W. Africa with the Peace Corps), but planning on finding and purchasing a buy-and-hold multi-family (preferably 4plex) in a Connecticut city (New Haven, Waterbury, Bristol, Torrington) as soon as I find the perfect one after getting back stateside in a year and change. 

I'm looking mostly into paying no more than 75,000 (purchase & repairs) with an ARV goal of around 110,000, which seems to be pretty attainable in lower-income but not war-zone areas in the listed cities. Whether this means getting a MFH for 25,000 and rehabbing 50,000 into it, or buying for 60,000 and only rehabbing up to 15,000 is still up for a mystery, but those are pretty much the numbers I'm comfortable with.

If life were easy, I'd get an FHA, as I'm looking for a fixer-upper that I can hold onto and rent for at least 5 years, then perhaps reassess the plan. However, my income for the last 2 years will be around ~$6,000 per year, thanks to the generous Peace Corps salary I'm receiving (note sarcasm :P), so I won't qualify. I'm hoping to get a solid 9-5 as soon as I'm back to at least give me a few months' worth of paystubs to go off of for whichever route I DO end up taking.

ANYWAYS, my question is - what is the sweet spot between hard money loans, traditional financing, credit card financing (repairs), and cash? 

I'll have basically $10,000 in hand of solid cash at the time of this theoretically well-timed buy, and I have $0 in credit card debt, with about $20,000 line of total credit and a solid score (720s - I'm 25, but I went kinda crazy when I was 21 and started really rehabbing my credit portfolio since I had so much in student loans, history of missed payments, etc. - these should mostly drop right around when I'm done with PC, actually, so hopefully the score will be 20+ points higher). 

Essentially, I was envisioning two scenarios depending on what kind of rehab I'm expecting : 

1. Buy ~50-60k, spend no more than $20,000 in rehab : I would try to get a bank loan with this, put 10% down in return for added points/higher interest rate, use the rest of my cash to pay closing costs / running costs, and then use a new 0% APR credit card with preferably 15 months at this rate to finance all rehab costs ; refinance, pay off the credit card debt, pocket $10-20K, which I will then use in my next buy-and-hold of similar numbers, but with a 20% down payment for better rates.

2. Buy ~25-30k, rehab of at least $35,000 : I would imagine the only way to do this would be to use a hard money lender, since I can't qualify for an FHA with my lack of (decently-paid) work experience. I wouldn't be comfortable charging this much in rehab on a credit card, and I feel like it's sort of strange when the scale is tipped like this to use so much more money in CCs than HML, right? So anyways, with this, let's say the purchase is 30 and reno is 40, that brings us to $70,000 out of perhaps a $110,000 ARV, which is just under 64%, putting me within the threshold of feasibility. So I will (because everything works out perfectly, obviously) get the 70K loan, with crazy high points and interest rates, then refinance after 6 months and the renovation went within budget and there are people in all the doors (remember, everything's going perfectly ;)), pay back the loan, then move on to my next property (though, assuming I get 75% LTV, this still won't give me much money in the pocket when the HML is paid back).

NOW, ONTO SOME QUESTIONS :) 

Thanks for sticking with me this far. I'm sure these noob posts get tiring, but I really have been spending a ridiculous amount of free time on these boards reading posts, listening to podcasts, etc., so hopefully none of these questions are TOO basic. 

1. So I know that to refinance a house that was paid for with a HML, you need to show 6 months of payments (right?)... is it the same for refinancing a mortgage? And let's give this question two possibilities, one where it's the same bank that made the mortgage in the first place, and one where it's a different bank; is there any difference?

2. Am I likely to get approved for an HML for the entire cost (purchase + reno) of a property given my circumstances? Like I said, I have not too much cash on hand ($10,000) to pay closing and various fees, good credit, but poor work history as of recent (albeit at this point, I'll have a steady stream of income, just a new one). I know HML lend moreso on the asset, but everyone on here kinda hotly debates how much your personal info plays a part, and mine basically has not much cash on hand. I could, I guess, get a CC with 0% introductory APR and make a cash withdrawal for a 3-5% fee if I have to have a bit of "skin in the game," but ideally this would not be the case. I don't want to involve family or partners - not on my first deal. 

3. I know a lot of BP members are not a fan of financing anything with credit cards that you don't have money in the pocket to pay off at the end of the day, but does the first scenario seem pretty feasible? If the threshold for refinancing a mortgage is only 6 months, I feel pretty confident with a 0% APR CC for 12-15 months. If the threshold for refi is actually 12 months, though, I would be verrry uncomfortable, even if the 0% APR were to go 15 months. I know that one could theoretically just open up a new account with free transfer and use the new 0% APR as a cushion, but like I said - I am very credit-conscious. I know REI will be a big back-and-forther, but I couldn't justify opening two high-balance credit cards to only use on one property.

4. I've tried every word combination search I can for this, but I cannot find an answer on the board. When you get a hard money loan, WHEN do you pay, and WHAT do you pay when you do it? Do you not pay until the end of the term (6-36 months)? Do you pay interest monthly? Do you pay the points up front? Basically, I want to know - let's say I have a 12-month HML for $100,000 (easy numbers) with 5 points ($5,000) and 10% interest ($10,000), that means that at the end of this deal, they walk out with $115,000. Do I just pay them $115,000 at the end of that 12th month the $115? Do I pay them whatever the monthly interest payment per month (~$800), then $105,000 at the end? Do I pay the points up front, then monthly interest, then just the loan amount (100k) at the end? Or does it just depend on the will and wishes of whoever it is I'm dealing with?

I'm sure I'll have more questions as you guys read, respond, and offer insight. At this point, I'm obviously open and still DEFINITELY in the learning stages ; I hope that when I'm ready to purchase toward the end of next year, I'll have a much firmer grasp on all this, have attended some CTREI meetings, networked and made some friends, etc. - but for now, this board is what I have. I appreciate it!! :) 

[Karin Crompton]

Hi, @David A. - good questions all around. I grew up in Litchfield County and my business partner (Mom) and lots of family still live there, so I know the area of which you speak. I think your numbers sound reasonable; it won't be easy, but it's doable, imho.

Others here can answer your questions better than I could, however, I do have experience working with hard money lenders in CT. I think it's probably the same process everywhere, but here goes: they do expect you to bring money to the table and you do make monthly interest-only payments with a  balloon payment at the end. Basically, they will fund a percentage of the purchase price (something like 80%) and then potentially the full rehab. You pay the points up front. So yes, the bummer of it is that, on that 100k purchase, you're bound to have to scrape together 20k toward purchase plus additional closing costs (including those 5k in points in this example). Then you make those monthly payments.

Then, on the rehab funds, the money goes into escrow and they will coordinate a draw schedule with you. These draws are milestones at which they will release funds. Let's say you have three draws. You could find yourself floating some funds up front to cover materials and some contractor work in order to get the work done; then the lender will likely come to the property to inspect (some, if long distance, accept photos) and then will release that first draw. If you can find a contractor who is comfortable with the scenario and can wait on the funds, great. But, being your first project and first time working with the contractor, they'll most likely want some payment up front, perhaps for materials and some portion of the labor. On that last draw, many lenders will want to see that all permits are signed off on. So that can be an even longer gap - thinking from the contractor's point of view - between when the actual labor was done and when the funds are released because the work will finish and then you wait a few days or so for the town/city inspector to come out and approve. Then the lender will do their inspection. Again, you may be floating some funds for materials and to the contractor (though I wouldn't pay them in full until all permits have been cleared). Others here may have a good way to address this gap issue.

Hard money lenders play an important role and have been integral in helping us build our flip business. However, they are indeed expensive and there is a good chunk of cash you'll be expected to come up with. But don't get discouraged, it can be done! Read some of the posts and blogs here about ways to come up with money, listen to some of the podcasts, and perhaps buy @Brandon Turner's book on investing with no and low money down.

Good luck!