BRRR Financing and Refinancing

[David Lauka]

Hello BiggerPockets Community!

I am planning on investing in my first property in the next 4 - 6 months and I had a question regarding HML financing. I am leaning towards a Buy-Rehab-Rent-Refinance approach and was thinking about using a HML for initial purchase and rehab and then refinance. I listened to a BiggerPockets webinar on the topic and it seemed to make a lot of sense. Are there any major concerns/drawbacks to using HML's to purchase and rehab properties? Is this a fairly standard/viable financing option for REI properties? My understanding is that with a large enough spread between the purchase cost and after repair value this can be an effective strategy.

Also, I've noticed that many of these lenders also offer 30 year rental loans or packages to offer both the initial financing as well long term refinancing.  Is there an advantage to refinancing with the same hard money lender or does it make more sense to refinance with a conventional mortgage?  Thanks!    

[Marty Johnston]

@David Lauka, Welcome to BP! And congrats on jumping into your first investment property. I can shed some light on your quesiton here. Hard Money Lenders have a wonderful place in the REI world. As you stated, they allow one to purchase a property, rehab it, and exit (either sell or refinance) without needing a tremendous amount of capital. If you don't have the capital, it can be strongly effective to use HML's if you have high deal flow as well. The trick is to make sure you have an exit strategy and even lined up with a lender so that you know you're approved out of the Hard Money loan.
The negatives of an HML is the high cost for money - 9-15% is the range we see for Hard Money, with 10-12 being market, and about 2-3 (sometimes up to 5) points at close. If you don't have an exit strategy and get stuck in a Hard Money Loan, it can quickly eat your profits.

"Also, I've noticed that many of these lenders also offer 30 year rental loans or packages to offer both the initial financing as well long term refinancing. Is there an advantage to refinancing with the same hard money lender or does it make more sense to refinance with a conventional mortgage?" You're absolutely right, and yes there is a benefit of going with a lender who offers both the Hard Money Loan and the refinance exit - Many lenders who offer this combo will often times wave the pts attributed with the second closing when you refinance into permanent financing. Depending on loan amount, this could be sizeable and save you some cash at your second closing. They may also offer special rates to piggy back borrowers. If you come across one, ask them what they offer.

Wish you luck!

Marty Johnston