Cons of Hard Money Lending for 1st Property
Dallas, TX · Member since 2017 · 13 posts · 3 votes
Cons of Hard Money Lending for 1st Property
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Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votesOriginally posted by @Account Closed:
I'm new to BP and to REI, but I'm ready to make my first purchase.
As I've been hunting for the right duplex-fourplex, I've gotten as far as applying for a deal I'd found, only to find out my credit wasn't sufficient.
My goal: purchase a small multi-family unit needing a light-medium amount of rehab, but I don't want to come out of pocket very much.
First Question: What options do I have? As I do not want to put down more than 5%, but will need lending to cover the rehab.
Second Question: Is hard money lending a viable option for this use-case?
- First property
- Small multi family
- Needing some renovation
- Wanting low-to-no money down
Third Question: If hard money lending is a good option for this -- what are the draw backs and what should I be concerned about moving forward with a HM lender?
A hard money is not a good option for what you're trying to do, but not because you're new or because newbies shouldn't use HML's. In many cases, they should, just not expecting 5% down.
A 203K would be a better option. 3.5% down on up to 4 units. MUST be owner occupied, but house hacking is a successful strategy employed by a multitude of investors.
Hope that points you in the right direction.
Stephanie
12 Replies
- Lender · Berkeley, CA · Member since 2017 · 1k+ posts · 549 votes8yFirst Deal, multi, HML is going to want to see 20% down at least unless there’s a ton of equity baked in.
- 8yShiloh LundahlPro MemberRental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
@Account Closed If it is your first deal and you don’t have much real estate experience under your belt than it is likely that a hard money lender will lend you less than if you did have experience. There is the possibility of finding such a great deal that a hard money lender will lend on the purchase price and the rehab, but it would need to be a really good deal and I’m still not sure if they would lend as high as you would like with it being your first deal even if it were a great deal.
The draw back of using hard money is the high interest rate.
- Lender · Berkeley, CA · Member since 2017 · 1k+ posts · 549 votes8y
Originally posted by @Account Closed:
A prudent answer is if you need hard 💰, As a a newbie, you shouldn't do the deal.
Don't books tell you if it's a deal the 💰 should be easy to get.
I don't see why you don't want to invest in your own deal? You have to 🌟 t somewhere.
Prove yourself first and financing will be easier moving forward. 😂
I'm not saying this because I lend to first-timers, as I would say it regardless, but your first line is woefully innacurate. Maybe this is the case in Las Vegas, but across the country people are using HML in a variety of ways to finance first deals. In fact, over 50% of the people I speak to are first timers, who have done deals with HML, and succeeded.
Maybe you heard that on a podcast, or read it in a book, and it resonated, but it's an absurd platitude.
- Lender · Hackensack, NJ · Member since 2016 · 1k+ posts · 372 votes8y
I disagree with a few things that were said thus far. I believe it would be a good idea to use hard money as a new investor depending on the deal. If your deal needs rehab work and the value will be increased substantially then a short term loan would be ideal.
If your credit or debt to income aren't up to par for conventional lending then HML might be a good option.
To sum up my opinion, it really just depends on the type of deal and borrower we are looking at. HM lending is a wonderful tool to be used under the right circumstances
- 8yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Originally posted by @Account Closed:
I'm new to BP and to REI, but I'm ready to make my first purchase.
As I've been hunting for the right duplex-fourplex, I've gotten as far as applying for a deal I'd found, only to find out my credit wasn't sufficient.
My goal: purchase a small multi-family unit needing a light-medium amount of rehab, but I don't want to come out of pocket very much.
First Question: What options do I have? As I do not want to put down more than 5%, but will need lending to cover the rehab.
Second Question: Is hard money lending a viable option for this use-case?
- First property
- Small multi family
- Needing some renovation
- Wanting low-to-no money down
Third Question: If hard money lending is a good option for this -- what are the draw backs and what should I be concerned about moving forward with a HM lender?
A hard money is not a good option for what you're trying to do, but not because you're new or because newbies shouldn't use HML's. In many cases, they should, just not expecting 5% down.
A 203K would be a better option. 3.5% down on up to 4 units. MUST be owner occupied, but house hacking is a successful strategy employed by a multitude of investors.
Hope that points you in the right direction.
Stephanie
- Lender · Berkeley, CA · Member since 2017 · 1k+ posts · 549 votes8y
@Account Closed I don't think you're utilizing logic all that well.
I said that "50%" are first timers who use HML, and are doing quite well. Which implies that all of the first timers I speak with are doing quite well. And the other 50%, if not first timers, could be 2nd+, and using HML (cause that's what I do), doing quite well.
That would mean 100% are doing 'quite well'.
Now I'm not suggesting that's the number, but I am suggesting you not take the LSAT.
- 8yGeorge DespotopoulosBusiness MemberLender · New York, NY · Member since 2016 · 936 posts · 287 votes
Hey @Account Closed
To answer you. I think not wanting to put more than 5% down will not be possible for the near-term. You will need to get a few rehabs/flips under your belt to qualify for 85%+LTC / 90%+ rehab costs.
Hard money is a viable option for your first property. Just again, the lender may require you to put 15% - 25% down, and may not fund 100% of rehab (likely 75% - 85% of rehab). Also, expect them to limit the rehab costs at 50% of your purchase price.
The drawbacks of hard money are that it's short term, usually 12 months, sometimes 6 or 18 months and it's also higher in terms of rates/fees. Expect, for a first time investor, something in the 10% - 13% range and to pay 2.5%-3.5% of the loan amount as an origination fee. This varies by the lender. Your concern with any lender should be their process/customer service, ability to lend, if there's a holdback for rehab, the draw process. Additionally, I would look for a lender that's upfront with their fees/process upfront so you know what's expected of you in terms of docs and criteria, time to close, and the cost of closing a loan with them.
MoFin Lending4.9152 Reviews - Realtor · Las Vegas, NV · Member since 2018 · 37 posts · 14 votes8y
@Account Closed Welcome to BP! I am also a newbie, but I wanted to bring up a point that hasn't been mentioned yet: exit strategy. As others have said, HML are short term use, and it seems like this multi you are looking for is something you'd want to hold as a rental. The problem in that case is that you won't be able to refinance out of the deal once the rehab is done in order to pay back the HML. When you refinance you'll usually be able to get about 60-70% of the ARV, which won't be all that much higher than your PP because you won't be doing a large amount of rehab. You'd have to find a very good deal in order to be able to refi out enough to pay back the HML.
Just for example, I've been running models that use that mode of financing, however (at least in Vegas), I have not found deals with enough meat on the bone to use HML to BRRRR the property. The only viable deal I have found in which HML would be a good route is in a property where the rehab costs will be about 3% of the ARV, and the property is selling for about 70% of the ARV. The general rule I've read is that you should pay no more than 70% ARV minus rehab costs. In this case it's close. But even then, I know I would not be able to refi out enough to get a HML repaid, so I would have to flip the property and the final profit out is 12k, minus the points + interest paid to HML and the cost to sell. This isn't a huge margin, and if something comes up then it could cost me to flip. The other option is to use a conventional loan but hard money/private money for the down payment. This may be a better option for you as well. You'd just need to find a way to qualify, like getting a great cosigner (pay them to sign with you), or by getting help from a parent or family member(money or HELOC on their home?), maybe even finding a partner.
As others have stated using an FHA with a 3.5% down loan sounds like the best option because of the fact that it is a multi and you could live in one unit for a year and rent the rest. The 203k actually allows for a rehab budget. It's just a matter of whether you still cash flow with the PMI. Even if you don't cash flow, it may be worth it to pay a small "rent" for a year just to be able to refinance out of the FHA (if you have enough equity at that point) to where you start to cash flow.
- Dallas, TX · Member since 2017 · 13 posts · 3 votes8y
@Michael Tully THANK YOU!! These insights covered EVERYTHING I was concerned about - *The Exit Strategy* - This was incredibly helpful. I think it would be best to continue improving my credit while shopping the investment plan to friends and family. Hopefully, I'm able to place myself in a better position by the end of summer to go with an FHA loan.
- Las Vegas, NV · Member since 2015 · 13 posts · 1 vote8y
Welcome to BP @Account Closed & best of luck to you!
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