New Construction Loan vs. HML, which to use?

[Jeremy Mims]

Let’s say that I am looking for a distressed property to rehab and rent out. What are the tradeoffs to using a new construction loan versus a hard money lender? Are there certain aspects of the property that would only qualify it for one versus the other?

From what I have researched, new construction loans have much lower interest rates (5-6% vs 12%+ for HML). So I am trying to figure out what would make hard money lenders more attractive in this case. Does the condition of the property determine which type of loan is available?

[Scott D Burrows]

@Jeremy Mims

The tradeoffs would be just that, looking at your case externally.

However, I assume that there are more legal parts to this question than I would be able to answer and I won't try to answer your question. 

On the face of it, 5% is better than 13%. However, hard money loans generally are done by private individuals and definitely very fluid or flexible to what you need to do on a flip.

Also, a homestyle loan (rates in the 4-6%) would also work for a distressed property, as it includes repairs and home cost into the total loan amount. Recommend you ask @Diana Muresan as I have worked with her and recommend. 

When you are saying new construction loans, do you mean conventional loans? 

If so, the tradeoffs would be a longer time to wait for closing, etc. Hard money would be a more seamless process, while still does require appraisal etc. However, a lot less middlemen involved with hard-money lending. If you are tempted to go the hard money route, give a call to a friend of mine at RCD Capital, Jonathan Surak. They have flip loans and landlord loans (8% interest only, which will come out to roughly the same payment as a conventional with principle pay-down (private so they don't count towards your property limit with conventional mortgages). 

Anyways, good luck and hope I didn't confuse you more. 

Summary: 

• New construction or conventional 
  • Better interest rate
  • Slower time to process and close 
• Hard money 
  • A little quicker
  • More expensive

Sincerely,

Scott