Hard Money and Private Lending Questions

[Jay Baxter]

Hello everyone, 

I'm a new investor buying in Birmingham, AL and I'm trying to get my financing sorted out before I buy any SFRs using the BRRRR strategy. I had a great conversation with a knowledgeable mortgage banker tonight, but thought it'd be wise to validate his advice with experienced investors here at BP.

The wife and I recently paid off our primary residence. Our plan was to use our HELOC to pay cash for properties, rehab them, place a tenant, and then finance them with a lender to pull 75% of the appraised value back out. Once we have our cash back (or as much as we can finance out), we'd rinse and repeat.

However, the banker told me this strategy wouldn't work unless I let each property season for at least a year. Even after seasoning, he explained I might only be able to get out the price I paid rather than price paid + rehab, meaning the bank is unlikely to allow me to pull 75% of the appraised value out.

Instead, he suggested I use a hard money or private lender as long as we can do the rehabs quickly, 30 - 90 days (which I'm comfortable we can do). That way a traditional lender can do a fannie or freddie loan to "refinance" the private lender. I'll get a great rate on a 30 year term and can likely do 75% of the appraised value even if that's more than I put into the deal.  

His opinion was that using a hard money or private lender so there's a loan to finance was the best way to go if I want to accumulate properties quickly on the best terms as long as I don't mind having them in my name. 

Can anyone opine on using a hard money or private lender versus using our HELOC? Has anyone run into this problem using their HELOC?

Thank you!

Jay