Borrow against one deal to fund another - private or hard money?

Question

I am looking at a 4-unit Sacramento, CA that a partner and I want to buy - it needs rehab and will only sell for cash.  Our plan is to purchase for cash, rehab and refinance out into a 30 year mortgage and hold it as a rental.

I would normally use my own funds for the purchase but they are sitting in a recently rehabbed property that is listed for sale.  So I'm looking for short term cash.

The rehabbed property I have listed for sale is worth more than the property we're looking to purchase.  Time is of the essence as we potentially need to show proof of funds next week and close within a short period of time.  The seller is a bank.

Here are my questions:

1) Would you use (a) the property being purchased as the collateral or (b) the property that is already rehabbed and waiting to be sold?  Using the rehabbed property will likely speed up the borrowing process but is it worth tying it up to make the purchase of another property?  Once the property sells the lender can be paid back right away.

2) Would you go with a private lender or hard money, assuming private lenders will likely be less expensive but may not be as quick as a hard money lender?  Or maybe I am wrong on that assumption?  I am still looking for both available options.

3) Is using a hard money lender even a viable option when purchasing from a bank?

4) What other options are out there?

I'm interested to hear what others would do.  My gut feeling is telling me it would be better to use a private lender as opposed to hard money.

P.S. - I understand that a lot more goes into the equation but I'm trying to keep it short and to the point.  Let me know if I should clarify anything to make more sense :)

George Krajacic · Answer

Most lenders would give you approximately 70% loan so you would need 30% down payment plus closing costs. If all your money is in the property being sold than the best option is to use both properties as the collateral. This way you get 100% financing plus the money needed for refurbishment.  If the refurbished property is sold than sale proceeds will pay off or pay down existing loan. By the way, in most cases private money is the same money other call hard money. Most important thing is how good a deal is the four units you are buying. If the project can absorb 10 to 11% interest rate for 6 months and the charge of about 3 points and still be an excellent deal then you go to a reasonable lender that can get you money on time.

If you have any other questions feel free to call me.

Good luck,

George Krajacic-714.723.6024

Bill Thompson · Answer

Sergey, if you need to move fast, hard money is your best option. A hard money lender will require you to have skin in the game so expect come up with 30% of ARV out of your own pocket.

Yes, hard money is very expensive but totally worth it for buying distressed properties.  I find that distressed properties tend to get snapped-up quickly by bottom feeders looking for a deal.  Have you ever lost a deal to a so-called cash buyer?  Many of the cash buyers out there are not sitting on a ton of cash... they use hard money.  Do yourself a favor and establish a relationship with a reputable hard money lender. They can provide proof of funds letters so that you can make strong cash offers on prospective deals.  You can use an all-cash offer as leverage to achieve a lower purchase price.

One key point to consider is you must be able to "get in and get out" fast.  Hard money is not appropriate if you anticipating a long holding period before being able to sell or refinance-out.

Gordon Cuffe · Answer

@jeff ra

@Jeff RabinowitzDo you ever do private lending in the Kansas city market for properties under 50k?   I am locating my own deals but don't have unlimited funds to buy them all.

Bill Thompson · Answer

To echo what Jeff said, private lending is relationship based... you borrow from people you know.  Private lenders may or may not be in the business of making loans.  The terms are whatever you negotiate based upon your relationship.  If the source of your private money is not a seasoned lender / real estate professional it is up to you to impose discipline on both the borrowing transaction and your real estate project.  We have all heard stories about well intentioned investors getting into trouble by being too loose with "aunt Sally's" money.  You should always use an attorney to formally document your private money transactions and consider using a third party servicer to ensure payments are made according to the provisions of the note.  On the real estate side of the equation, your private lender may not be able to provide the same level of oversight that a hard money lender typically does, so be careful.

A hard money lender on the other hand is in the business of making loans.  Just like a bank they will not lend to you if your deal does not pencil-out with a viable exit strategy.  Moreover, they will impose discipline on the construction / rehab process by advancing funds according to construction draws, requiring routine inspections, checking for adequate insurance coverage, checking mechanics liens, etc.

The differences between private lenders and hard money lenders can be very drastic.  However, if you want to do a lot of transactions, you will probably need to use both... a lot.

Jeff Rabinowitz · Answer

I have been a private lender occasionally. I funded one deal within 24 hours.

Jeff Rabinowitz · Answer

I disagree. Hard money lenders are in the business of lending money. They must lend in order to stay in business. Private lenders are willing and able to lend but they are not in the business of lending money and do not need to do so. Private lenders are often friends, family or acquaintances. The terms for these loans may be similar or dissimilar but the processes both types of lenders use will probably be different. Hard money lenders are likely to follow very specific procedures. Private lenders may have given little thought to their process--your loan may be the first one they have ever written.

Boyd McClean · Answer

Bill summed it up. Establish prior relationship with a Hard Money Broker. Every borrower wants the money yesterday. If you established a prior relationship then your issue would not exist.

Hard money is really not expensive at around 12% when you consider the risks involved for the broker and that you are saving time and you can get started right away.

Charlie Fitzgerald · Answer

Hard Money Loan....best and fastest option...

Gordon Cuffe · Answer

@Sergey TkachevThis is easy. If you know someone who has the money ask them to fund you fast. If not go to a hard money broker. A hard money broker that I have used just emailed me saying they have funds to lend as they just had payoffs. I can give his info. Or just google hard money lenders in Sacramento. They can fund fast.

Brett R. · Answer

1) You may want to consider growing slower without over extending yourself when it comes to buying up new properties and using your other properties as collateral. Best to anticipate the worst case scenario when purchasing a new property than allow yourself to over reach too quickly and take a heavy loss that ties up potential revenue from a collateralized property.

2) Most lenders will negotiate with you; as long as, you can prove you have some skin in the game. 20%-30% will usually give you decent wiggle room when it comes to interest rates and closing costs. Make sure you ask what the closing costs will entail.

3) You can utilize a private lender to refi your current loan with a bank but know that most lenders would prefer not to because if you can;t pay your bills with a lower interest rate, chances are they will be hesitant to give you a loan with a higher rate. Good lenders want to get paid back and do not want to go through a foreclosure process. Quality private lenders are in the business of lending money to experienced borrowers who pay their dues on time; they're not in the business of property management.

4) Hard money and private money lenders are good options just be sure to ask about hidden closing fees and where their money is coming from. Most hard money and private money lenders source their capital from different areas but there are is a small niche of private lenders that lend from their own money and can be more direct and charge lower interest rates. Make sure to ask good questions. You could  consider bringing friends or family in as investors and pay them back their invested amount at the sale of the property.

Hope you find this helpful.

Borrow against one deal to fund another - private or hard money?

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