Getting started with hard money

[Rodrigo Barreiro Pujol]

I am looking to get my first property using a BRRRR strategy to profit on my first rental and then grow from there. I want to use a hard money loan with 100% financing and find a good property to rehab and cash out refinance for some profit after I put a tenant in it. Is this a good strategy to start off with? My goal is to use none of my money and start/grow my rental property portfolio (I have little money to fund deals with hence the 100% financing route). Tips? Cautions?

[Andrew Eherts]

Hi @Rodrigo Barreiro Pujol. I have not seen the deal, but I can give you a couple items of caution from my experience in private equity and unconventional financing strategies. I am sure there is more others can add, but this is all I can come up with right now. 

Don't let the below deter you--private hard money can be a great way to get around the banks for projects that carry a bit more risk (like a BRRRR).

Hard money is going to come with carrying costs, and this is often used in flipping because of the quick turnaround. On a BRRRR, you have the full rehab (1-3 months-ish depending on the scope of work) and the seasoning period most banks require before financing (6 months or so). I always expect to budget for a minimum of 8 months of carrying interest that either needs to be extinguished with the cash out or paid along the way depending on the terms. Just be sure to account for it!

Also, try your best to make certain your underwriting and rehab budget are rock solid. Backing up your rehab budget with itemized bids would the best way to isolate yourself from risks associated with ballooning costs, as they can get out of hand. You'd hate to run out of money because of an unforeseen issue.