Can you refinance out of a hard money loan?

[Melissa Harris]

My business partner and I have found a great deal for a buy and hold but it definitely needs repairs. We would like to use a hard money lender to finance the purchase price and repair cost. I spoke to one this morning and they can cover all of the purchase price and 90% of the repair cost, so we will need to bring $10,000 to the table at closing, which we are fine with doing.

My question is, can we refinance this property into a 30 year conventional loan and use it as a rental instead of selling the property? This would produce us $303/month in cash flow and have a 14.6% cash on cash ROI. If we did this, will a hard money lender allow for us to keep the property instead of selling it?

[Nghi Le]

@Melissa Harris

You mean 90% of the purchase and 100% of the rehab, right?  I've seen many lenders offer this, but none the other way around because that's essentially 100% financing and no lender likes to do that.

Be careful about thinking that all the money you need is just 10% of the purchase price.  There are also things like closing costs, points paid upfront, prepaid insurance, prepaid interest etc.  Lenders also like to see 3-6 months of monthly interest reserves as well as enough money in the bank to start the rehab work (because the rehab is reimbursed in draws, not given up front).  I don't want you to get the property under contract and then get near the end and have the lender tell you that you don't have enough reserves in the bank.

If you plan on refinancing into conventional, you'll have to switch the title to your name (because I assume the HML will want you to take title in an LLC), and there are seasoning requirements. I suggest you plan this up front with a conventional lender before purchasing the property and make sure you're able to check off all the boxes to do this correctly.

As @Jack Bobeck mentioned, you also have the option of refinancing with a non-conventional lender. It'll be a little more expensive, but much easier to qualify for than the rigid rules of a bank, and you'll be allowed to have the loan in your LLC. Usually, they have less seasoning requirements as well. I've seen a few with no seasoning at all.