Owner occupied 3.5% vs Hard money for my 2nd buy and hold

[Andrew Nugent]

Hello BP!

I am looking to do my second deal in an effort to continue building my rental portfolio. Right now I'm short on cash, could pull together some private investors however that would take more time then I wish to spend, so I'm trying to figure out whether to pursue a live in "househack" with conventional financing or a hard money loan and aim to do a rate and term refi. I know a lot is contingent upon my numbers and purchase price but generally speaking which option would YOU pursue and why? I have never used hard money and am unfamiliar with rate and refis.

[Tim Johnson]

I had a great experience doing a house-hack for my first duplex property to get my feet wet. It had a rate of 3.875% fixed / 30yrs. If it were not owner occupied, I recall the rate would have been closer to 4.5 - 5%. 

Later that same year I turned around and wrote a private money deal for someone and I'm charging them 12% with a one-year maturity. If the market rate for private money was much lower than that, they would have got their money elsewhere.

All else held equal... if you have the opportunity, personal flexibility, and down payment cash to do a house-hack through a conventional lender, I would leverage those factors in your favor. You will secure yourself a much lower rate for the long-term in a single transaction. Why pay ~12% for hard money for a year or three years, go through the hassle of refinancing to conventional, and ultimately end up with a higher long-term rate after interest rates have risen?

On the house hack: Your rate may vary depending if you are using an LLC (I'm not). Owner-occupancy rules may also vary depending on lender -- but I had to transfer cities for work within a few months of purchase, and the lender had no problems with that. Also -- look into doing an FHA loan. I chose to do 20% down for my conventional loan, but you could perhaps qualify for 3.5% if the deal meets FHA requirements.