Should I get hard-money loan?

[Sahil Relan]

Hi,

I am looking to buy a 2-unit property for 100k, some tenants are already living and paying there. It is a REO. The property needs minor repairs which I plan to do with the cash-flow generated. I have these two questions:

a. Do I need to do a hard-money loan to BRRR? With this property I can get a regular loan.

b. Should I get interest-only loan or regular loan? The way I see it, even if I BRRR I will have more equity in the house.

Really appreciate your inputs. Sorry for the noob questions, my first property!

[Lore Postman]

Hi @Sahil Relan. Congratulations on setting the goal to buy your first rental property -- and for finding a property that seems to work for you. For many new investors, that's half the battle. 

You've provided some details in your question that might help you find your answer. 1) "With this property I can get a regular loan." 2) "The property needs minor repairs which I plan to do with the cash-flow generated." I'll show why those answers are important in just a minute. 

A few other answers that would be helpful are:
1. How close is the property to where you live? If it's nearby, do you see yourself staying in that community for 5-10 years (or perhaps longer, if you have family and deep roots there)?
2. Would this property be one that you are using to "learn" how to be a landlord, or does it have attributes that would make you want to keep it permanently, possibly one day passing it to your future heirs?

When I buy properties, I try to find financing in the following order (and for the following reasons):
1. Seller financing: It's fast, easy, and flexible, since the seller and I set our own terms. I usually try to talk the seller into letting me pay in installments for seven to 10 years at an interest rate of 3% to 5%, and with a down payment of 7% to 10%. I like seller financing because I don't need to buy PMI (private mortgage insurance), which is an insurance policy that lets you make a lower down payment by insuring the lender against losses if I fail to pay the mortgage. At the end of the loan period, I must pay the balance of the loan in a balloon payment (or refinance).

2. Traditional loan: This is attractive with the current interest rates being below 4%. Most banks require 20% down (or tack on the PMI) and a good credit score. Traditional lending can be the most complicated and paperwork heavy, which is driven by banking regulations put in place to help keep the financial markets from collapsing again. However, this is a good approach if you want to keep the property for a long time and possibly pass it to heirs one day. I personally focus on buying properties with great lots/land that are a short walk from a vibrant area.

3. Private loan: This type of loan generally comes from an individual or group of investors who are looking to earn a higher rate of return than at a bank or invest in an area safer than in the stock market. You and the private lender set your own terms, such as length of years and interest rate. Private loans generally are longer and more favorable than hard money loans. 

4. Hard money loans: These are generally short-term loans (less than a year) with high interest rates and other fees. In full disclosure, I've never taken a hard money loan, in part because I don't flip houses (I'm a buy-and-hold investor) and I find hard money terms hard to stomach. In talking with new investors who have used hard money financing, I've seen terms like double-digit interest rates, origination points, application fees of hundreds of dollars, and pre-payment penalties. And the loan terms seem to be harshest on the newest investors, since they don't have proven experience and are deemed a higher risk for the lender. 

To circle back to your answers above, your property needs minor repairs that you are able to pay with cash flow. That rules out the "benefits" of a hard money loan, and saves you the cost and effort of having to convert to one of the other loan options. 

I hope the information above helps. Happy to clarify any of the points or share more thoughts as you fine-tune your approach. Again, congratulations on this big step!