Hard Money Lending to purchase a rental

[Kenny Anderson]

I have a newbie question. I see hard money lending is usually used for flips. Would there ever be a situation where hard money could be used to purchase a property that could be a buy and hold and used as a rental? Seems like the fees associated would be too high and it wouldn't make sense to use. Just trying to figure out financing options to obtain properties in the $250K-350K range without using traditional financing.

[Christina R.]

I have not done either so this is based solely on a year's worth of scouring this website, going to local Meetups and REIAs and networking with investors who rehab and investors who buy-and-hold. HML is risky to begin with for the reasons Richard and others have mentioned above. My perception is that it is somewhat less risky for a rehab because your intent is to resell at the end of the work, thereby paying off the HML lender. 

For rentals, you have that seasoning issue and HML is really not meant for a long term loan. Definitely comes down to numbers - are you buying low enough that a downswing in your local market won't depress values to the point that you can't refinance out of the HML? Is your area like Baltimore City up here where the foreclosure process is long and hard and HMLs got so burnt in the boom aftermath that it is virtually impossible to get an HML to rehab for rental up here?

As @Ned Carey has told me, the devil is in the details with HML terms (well, just like any loan when you really think about it). If you go that route I would recommend no term less than 12 months (what if your spruce up takes longer, and costs more, than expected?) to borrow the money, what the fees if you have to extend that term, etc.

If this is your first deal, it will take longer and harder to find an HML. You need experience to develop that HML lender relationship and they usually won't lend unless you have experience so it's a catch-22. Ask me how I know.