New Investor: Go Conventional or Use Hard Money?

Question

I'm a new investor seeking my first SFH. I have enough cash to cover a 20% down payment and repairs but would like to use as little of my own money as possible. I plan to buy in the next 90 -120 days, then cash out refi to purchase another property by end of 2QCY24 and do the same to obtain a multifamily by year-end 2024. For my first property and to deliver on this strategy, should I look for something turnkey and needing little reno and go conventional OR look for something I can get for 80% of purchase price, force equity through reno, and use hard money to cover down payment and reno costs?

Jim K. · Answer

@Jamy Lomento

I'm looking at the advice you've gotten so far on this thread and my mouth is hanging open.

The overwhelming consideration you need to think about is that it is currently MID-JUNE. It is the height of the construction season. Most contractors worth a damn are already booked solid for the next two months. Just how the hell we've gotten this deep in the thread and none of the people who have replied to you have given that any consideration whatsoever except for @Greg Scott is completely, utterly beyond me. If you go the heavy renovation route, YOUR BIGGEST PROBLEM HERE IS NOT THE MONEY. Unless you get incredibly lucky, it takes years to build up a good, deep list of trusted local contractors to work with and gain the knowledge and experience of how to work well and profitably with each of them.

Granted, it's a money forum, but someone's got to tell you at least something of the honest truth, instead of trying to sell you a mortgage product and cash in on what is most likely to be your eventual misery.

Greg Scott · Answer

For a first deal, its usually better that it be a decent investment with a lower degree of complexity.

Assuming you know how to manage rehab and know how to find a good deal (purchase price + rehab + closing  is much greater than ARV) using hard money makes a lot of sense. I'd choose that over waiting for a cash-out refi.  If you do the math, you really end up at about the same financial place.  Personally, I'd rather have that cash in the bank than tied up in equity that isn't working hard for me.

Jamy Lomento · Answer

I am positive I'll have to look at a ridiculous number of properties to find something that will work for me. I'm not afraid to part with my money, but would prefer OPM where I can. In talking with some lenders from my local REIA, I do have some options that could work, but everything has to align.

Jamie Parker · Answer

Getting a good deal will help out a ton no matter which way you run the funding.

Bobby Feinman · Answer

@Jamy Lomento Good morning. Finding distressed properties to rehab that will increase value is always a better strategy as long as you have the right team in place to execute successfully. Specifically, having the right GC in place that can be trusted and will complete the project on time, on budget and correctly.

I want to point out another issue based on you being a first time investor. The 3 things that lenders need to underwrite with respect to the sponsor (borrower) are credit, liquidity and experience, especially today with the current state of the economy, political uncertainty, etc. Being a first time investor is an issue and it sounds like liquidity might be an issue as well.

I would suggest that you consider taking on a partner for your first deal that will solve the experience and liquidity issue. Hope this helps. Happy to jump on a call to discuss further!

Bobby

Bobby Feinman · Answer

Happy to jump on a call to discuss further!

Jamy Lomento · Answer

Account Closed - I sold my primary residence in November 2022. I could see FHA as an option.

Account Closed · Answer

This would be your first investment property, but do you own a primary residence? If not, could look into an FHA loan, which may help you get in at a low down payment. Hard money is a good short-term debt instrument for rehabs.

Jamy Lomento · Answer

Appreciate the info. The numbers I'm running when looking at properties are reflective of this. I'm looking at a house hack for the future, but not now. And yes, I'm both looking at properties and talking to lenders.

Nicholas L. · Answer

@Jamy Lomento

buying something below market value, fixing and then refinancing is a BRRRR.  and  to successfully execute a BRRRR, you need to buy waaaaaaaaaaaay below market value - not 80%.  more like 40-50%.  and there are lots of costs involved in a BRRRR that get overlooked on BP - closing costs, holding costs, financing costs, refi costs.  these can be tens of thousands of dollars.  the simplistic formula of, for example, buy for 100 rehab for 50 refi at 200 is way off and understates the costs involved.  i even heard david greene say on a recent podcast that you can get 80% LTV on a refi.  but i'm seeing 65-70%.

and also... as others in this thread noted, despite the hype, hard money lenders don't just hand out 100% of needed funds.  hard money... requires a down payment just like conventional unless you have a long track record or some kind of unique relationship with a specific lender.  and to go back to my first point, if you don't knock the equity increase out of the park, the HML is due, and you'll have to cover it with your own cash.  HML just isn't a panacea.  it's actually high cost and high risk.

not trying to be discouraging, just trying to be realistic.

some kind of live-in flip or house hack would be lower risk.  are you looking at properties and talking to lenders?  Or still in the planning stage?

New Investor: Go Conventional or Use Hard Money?

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