Using Hard Money Lender to purchase SFH/MF unit as 1st rental property

[Junior Salters]

What are the downfalls of this as from what I know would be greater than the benefits? I know it can be done successfully and has by experienced investors? If the deal is a strong one, does that matter even if investor is fairly new to the game?

[Jeff S.]

Hard money is short-term money – typically for six months to a year. You pay through the nose for it, want to minimize your exposure, and know well in advance how you will get out.

The problem is that hard money is easier to get than conventional financing and can draw you in. I’d be careful using it to fund long-term investments; especially if you’re new and unused to obtaining conventional financing. I can think of a few exits.

Bruce Norris, a local HML here in southern CA, offers a "Refinance Rental" program at 9.9% for 8 years here. Unfortunately it’s only local, but you might search around for some innovative HML’s in your area and suggest a program like this to them. As flips dry up, smart lenders will be looking for safe uses of their cash.

Alternately, if you know anyone, there are always private money loans you might obtain from personal contacts if you offer them higher than CD/savings account rates. I bet you know more people upset at earning 0.1% right now than you think.

Partnering with someone that has cash but no interest or knowledge in real estate might also be an option.

If you can purchase a portfolio of properties at once (yes, it happens) it will likely find be easier to find a lender willing to fund these long term, than if you buy one SFR at a time. In general, you'll have to bring some money to the table and also show some experience. This will almost certainly mean a partner, in your case.

Unfortunately, the money’s not going to fall from the sky, Junior, and there are no secrets to finding it. You should be as aggressive looking for money as you are for properties. Good luck.

Jeff