Buy with my own cash or use hard money

[Nick M.]

I made an offer on an REO property in southern NJ. Details below:

Offer price: 70k

Rehab budget: 35k

ARV: using comps in the area 165k. Going conservative and will say 150k

Goal: Probably fix and flip. May BRRRR.

I have the cash to purchase the property outright. I have enough equity in the other properties I own to take a HELOC to cover the rehab. However, I'm considering using hard money lender for the purchase price of the home. I don't want to use them for the rehab as I will be doing some of the work myself and I'm not a licensed contractor so getting reimbursed with draws wouldn't work.

I understand that I will make less money due to the various fees that come with hard money lending. My thought process is twofold: 1) I'm not sure I'm comfortable using 2/3 of my "safety net" (savings in case I lose my job, someone in my family is in hospital, etc.) to fund the purchase. 2) My goal is eventually to purchase real estate in a better area where tenants are more stable. I won't have enough cash for those BRRRRs. So by using hard money now, I prove my ability to get a flip done and start getting better rates, fewer up front points, etc. for those larger transactions later.

Curious to get other's feedback on any and all of the above. Thanks in advance!

[Aaron Pfeffer]

It never ceases to amaze how many investors disparage the use of HMLs. There's this never ending stigma that all are predatory scumbags who can't wait to steal your property after you slip up. Uh, no. Nor should you ever use ALL of your own cash if you don't have to. Especially for a flip. I promise you there are a number of HMLs who will fund you 70-80% of your purchase price on a one year note with no prepayment penalty for a reasonable interest rate and fees, and you can have them include 100% of the rehab money or not depending on how you operate with your flips. That part is up to you...but leverage is everything. And you know what else? You can just as easily get a non-recourse hard money loan for maybe another 1-2 percentage points on the rate if you're really concerned about a personal guaranty of the note. When it comes to flippers, there are a number, a ton, a plethora! of national and local HMLs in every state in this beautiful country of ours who want to fund your project with the intent of seeing you succeed, making you a repeat customer, and doing it again for your on your next project. These loans are business purpose bridge loans on non-owner occupied property and everyone involved in the loan process (lender and borrower and escrow/attorney and title company) should be speaking the same language. The language of profit. The borrower makes a profit, and so does the lender. Rinse, repeat. So yes, use an HML @Nick M. What really stands out about your post is that you are from North Carolina and purchasing a flip in New Jersey, and I hope you are comfortable and qualified to do an out of state flip, because that can be daunting. And honestly, the numbers you are throwing out are meh. You're saying the rehab cost is half the cost to buy the house. That's a bad ratio right there already. Then purchase costs, holding costs, and sales costs to make $10-20K in taxable profit, and that's if your rehab doesn't balloon to $50,000 like they often do. If you have the cash to do this yourself, you'd be better off lending out your $100K as a private lender yourself at a max of 60% LTV for 10% interest. That's $10K annualized right there and you'd sleep at night and have all that other free time on your ends not doing a flip in South Jersey. But that's just one person's opinion...