Should I Use Hard Money?

Question

I am new to real estate investing and am looking to buy my first duplex. Unfortunately, I am locked into my lease for 11 more months and do not want to break my lease because I have two other roommates that are very good friends of mine. I don't want to force them to move or have to worry about living with a random roommate to replace me.

I also do not have enough money to put down 20% for a property. I was originally considering house hacking the duplex with an FHA loan so I could basically be living for free in the duplex but then I would still have to pay my monthly rent of $800 a month at the apartment that I have. I am starting to learn more about Hard Money so now I'm questioning if it would make more sense to get a Hard Money loan to allow me to make a 20% down payment so that I can live in the apartment that I'll be paying for anyway and also be able to rent out both sides of the duplex that I buy.

Hard Money sounds risky to me because of the higher interest rates but in this situation I feel like it may make sense. The interest payments on the Hard Money Loan would be cheaper than my apartment payments I would have to make if I house hacked the duplex. The duplex should cash flow and be able to cover the interest payments but even if it doesn't, I make enough money with my day job to be able to easily pay the interest payments and even start paying the principal down on the loan as well. My exit strategy would be to cash-out refinance after a couple years to repay the Hard Money lender. Please let me know your thoughts!

Colten Powell · Answer

@Benjamin Haraway

Hi Benjamin!

I wouldn’t recommend using hard money as a downpayment. Usually you’re going to want to use a hard money loan for a short period of time. So in a BRRR or a flip. These are typically a 6-12 month process or even shorter sometimes. I would recommend continuing to save $ while still in your lease and go ahead and start researching and running numbers on properties. I know things can get antsy when you’re pumped to get into the game but don’t rush it too much or you may end up regretting it. I bought my first property last year that’s a 3 unit and I have a tenant and also run an Airbnb. It has real power but you need to be in a good position to do so first.

Stephanie P. · Answer

Hey Benjamin

Your instincts are good.  House hacking is the way for you to go, but spend some time researching the area and deals that are out there so when you're ready to pull the trigger (in about 9 months) you'll have financing in place, your lease will be almost up and you'll be ready to settle without additional costs.

You should try to exhaust all avenues of conventional/government/first time home buyer benefits before you get into hard money; particularly if you don't have 20% down for the acquisition.  Learn to be a homeowner first with other people's money (a duplex or quad for tenants to pay your mortgage, higher loan to value loans and down payment assistance programs) before you have to put 20% down, incur larger closing costs, put money out for permits and renovations, pay contractors who decide to not show up and the myriad other things that can happen on a renovation.

Stephanie

Patrick Knapp · Answer

@Benjamin Haraway

Hard money has its place in real estate.

Like many things it has its good and bads. If you don't have a good deal hard can be dangerous, but if you have an amazing deal with tons of equity hard lending can be helpful to close a deal fast.

Jeffrey Donis · Answer

@Benjamin Haraway I'm not sure if you've considered owner financing, but I would look into that. Pace Morby on Youtube has lots of great content on that.

Look into this creative strategy. It's pretty much when the seller accepts payments over time. Duplex owners are more likely to be mom and pop owners, so they are more likely to be open to this. This way, the seller acts like the bank.

Rico Quatro · Answer

Have you looked into a 203(k) loan?

https://www.nerdwallet.com/art...

David M. · Answer

@Benjamin Haraway

You need to use the "right tool" for the job.  Hard money loans are interest only, short term (3,6,12 months) loans.  For new investors, the rates are generally worse than 10%.  They are based off the deal which allows for obtaining financing on a property in poor condition, basically some sort of unlivable house that won't qualify for conforming residential loans.  so, ultimately, you will need to refinance into a residential loan.

So, that may have been a nice idea, but it really doesn't work out.  Basically, you aren't in a position to buy a home given your lease situation.  Good luck.

Benjamin Haraway · Answer

@Patrick Knapp Thanks Patrick.

Benjamin Haraway · Answer

@Jay  Good to know, thanks!

Benjamin Haraway · Answer

@Colten Powell Yeah that makes a lot of sense! Yes, you’re right that I’m antsy to get started. Taking the time to continue saving up and researching is probably the right call.

Should I Use Hard Money?

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