Hard Money loan to make a deal work or is there a better option?

Question

Trying to make this deal work!

Cash Price: $129K'

Rehab Costs $100k

ARV: $265-285

Initial plan was to have an GC purchase house cash, get hard money for rehab and the flip it to my partner and I. However he has decided the margin is too thin for him to do that.

He suggested we purchase the deal using a hard money lender, getting a loan for 70% of purchase price, 100% of construction costs at 13%. At this time we do NOT have the capital to cover cash cost of house and entire costs of construction.

However my partner and I are trying to avoid the large costs of a hard money loan if we can and we are not quite sure any potential risks of using hard money since it isn't a flip and will be a buy a hold in regard to seasoning period and refinancing in a timely manner to pay back hard money lender.

Any ideas??

Jon K. · Answer

I'm a bit confused. You're trying to get your GC (general contractor) to buy a property for cash. Then you and your partner will get a hard money loan to cover the cost of rehab, at which point he flips it to the two of you to hold as a rental? Am I reading that right? That would be a very unusual arrangement.

It sounds like you understand the risk of using hard money on a BRRRR quite well: what happens if you don't have the equity + capital required to refinance out of it? You'll be stuck paying hard money rates until the loan is due and then it's due in full with all that that implies. To be clear, there's nothing wrong with using hard money on a BRRRR deal if you understand and accept that risk and are confident in your numbers. I've done it myself several times.

If you already have a deal in front of you, time is likely not on your side. Maybe reach out to your network and try to find a less expensive HML? But also ask yourself in the context of this deal, does saving 2% per month for 6 months make or break it for you considering it's something you'll hold for long term profit?

Are you direct to seller on this? Do they have a mortgage or liens on the property? Would something creative like subject to or seller financing work for them?

My unsolicited advice is to never stop exploring financing options as an investor. Private lenders, HELOCS, hard money lenders, portfolio lenders, etc, etc, etc. So that when you do have a deal in front of you you have options and aren't left scrambling.

Hope this helps.

Jay Hinrichs · Answer

the deal as presented would be financial suicide to take a HML on .. not nearly enough spread unless your going to just refi and keep and even at that may need extra capital.. for a flip its break even at best

Patrick Giblin · Answer

@Chris Levarek Incredibly helpful thank you so much! In the process of working through all those numbers/costs you mentioned multiple times to make sure I have the numbers solid. Your point about pulling the equity out during refinancing impacting cash flow is definitely something I had not thought of while running through this. Cash flow out of the gait is definitely important to us, so I gotta run where we would sit based on how much we would pull out from the deal if we did it as is right now. Thank you again.

@Mark Gallagher That was an estimate provided from the GC who originally had interest in taking on the project that I mentioned in the initial post. He has experience flipping and does that in addition to his construction business.

Mark Gallagher · Answer

@Patrick Giblin simply put - don't do a $100K renovation to break even. Just don't do it.

That being said, where is the $100K renovation number coming from?

Chris Levarek · Answer

@Patrick Giblin To find out if it's worth it to you, simply take the cost to get to goal and you have an answer. So I've done a few of these refinance out deals after a set seasoning period with short-term debt being paid out. Typically that's going to be 6 months. If the above plan is what you do...

The question then becomes, what is the cost to you of :

• Hard Money Loan cost for 8 months (add on for safety)
• Closing costs at initial sale
• Closing cost at refi
• Legal entity cost at refi
• Lender refi cost on new loan
• Reserves cost for unexpected
• Insurance cost during hold

If the deal still makes sense with those costs, meaning you are comfortable with the end return or result with those costs built in, you have your answer. A big mistake however is to assume it all goes to plan and not calculate the value of your time.

Quite simply, 6-8 months is a long time to simply come out with little or in debt. Additionally, remember, a refi on the new value will slim down the cashflow quite a bit, so be sure it's worth it to you at the end when you refi.

Pulling out the equity helps drive up your return on effort but could decrease your margins and profits for the foreseeable 2-3 years until you could maybe refi again in a buy and hold.

Yet I agree, if it doesn't work one way, look for another. Cheaper short-term debt with a private lender, or bring another equity partner with capital or, or, or...

Thanks for sharing! Look forward to hearing more.

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Patrick Giblin · Answer

@Zachary Beach yes its far from the perfect deal. Thanks for the input

@Marc Rice Interesting option. Something we could consider. Thank you for your input

Marc Rice · Answer

@Patrick Giblin

You could wholesale it and use that money towards your next deal. This one seems a little tight rehab wise.

Zachary Beach · Answer

@Patrick Giblin that’s not a deal unless your ARV is way low and your rehab Budget is very high normally it is the other way around.

Patrick Giblin · Answer

@Jay Hinrichs Agreed! That is why the GC passed on offering to purchase himself with cash, use hard money for the rehab and then sell to us. When he first brought it to us in that format I was surprised as well and was not surprised he changed his mind.

@Jon Kessler To clarify...we are trying to purchase for 129K, put in 100K of rehab, hope to refinance for a long term buy and hold rental, not flip the property. ARV conservative is 265K.  Looking for creative ways to finance while avoiding costs of hard money loan. It is listed on MLS but my partner is an agent in the area and knows the seller. Its an estate sale and they are motivated to sell. Listed at 149k and have had multiple offers from flippers at 100k cash which they have passed on but the seller would be open to selling to us at 129K if we could do cash. Time is not too big of an issue, as its been on the market for a while a needs a total gut to be livable. Unsure of mortgage or liens or property but pretty sure it is owned free and clear. I can't say I know much about subject to, seller financing may work, but still would need capital for the repairs.

This would initial be owner occupied with a MIL suite for short term rental, then transition to either two STR or two unit LTR in a few years.

My thought is look for better terms on a hard money loan than what I listed, or see if a bank could provide some type of construction loan.

Hard Money loan to make a deal work or is there a better option?

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