Should I finance the Rehab? HML Advice

Question

Hello I am looking to invest in a few properties out of state and throughout my search I've found a few private or Hard money lenders that are willing to finance 100% of the improvements and 90% of the homes purchase price. My question is should I pay for the repairs separately instead of the initial HML to finance the repairs? Our goal is to BRRRR these properties and would like advice on the best way to start with the initial loan. We could put more than the 10% minimum down but should we?

Beyond the obvious benefit what other advantages are there to having a hard money lender finance the repairs?

Daren H. · Answer

If you are going to BRRR into conventional 30 year fixed rate financing in less than 6 months seasoning, it could be a benefit to have the rehab included as part of your HML loan. For example, I buy a 2 unit property for $90K, needs $30K rehab. ARV is $180k. HML Bridge Loan will do 75% of ARV ($135K). HML loans me $90K for purchase and $30K for rehab (rehab held in escrow). Reimbursement for rehab only requires that I send pictures of completed work and they reimburse me. Means I only have lender fee and closing costs in the deal at closing. The property now has a lien on it ($120K=$90K + $30K). I can immediately refinance into a conventional loan after completion of rehab without 6 month seasoning since I am not taking cash out. I can roll in refi closing costs into the conventional loan as well. I now have a 30 year fixed rate loan for the 2 units, with little of my own money in the deal. Rents $2000 a month. Solid deal.Now, if I paid for the rehab out of pocket and wished to refinance into a conventional loan in less than 6 months in most cases I am not going to be able to roll in the rehab costs into my refinance loan. The conventional loan will only cover 75% of ARV or purchase price, whichever is lesser (key point, whichever is less). This would mean I have an additional $30K of my cash in the deal for the out of pocket rehab. Not good for me. I would have to hold the property for 6 months of seasoning before I could get a loan for 75% of the ARV. Number of properties owned/financed, credit score, reserve requirements, etc will factor into your situation as well. The key is you have to buy the property with hard money costs in mind. Sure, I didn't like the fees at first, but when I immediately started deducted this expense in my offers. Now I don't think about the fees as much. Not to mention, the lenders are a second set of eyes to make sure the deal makes sense. Make sure you compare the loan costs of the HMLs you are considering. Also, ease and speed of completing the transaction is important. Sometimes paying a higher interest rate is better than a lower one when you consider junk fees and ease of transacting.

Kris Marmol · Answer

@Taylor L. That’s a great point, it would definitely be useful to have a second set of eyes that are more familiar with that process and possibly (preferred) the location I’m investing in. I will be setting up professionals in the area to help me manage the properties. Unfortunately at the current location that I’m interested in I don’t have anyone that I personally know there￼.

Brian Beck · Answer

I agree with @Taylor L. with regards to the 2nd set of eyes. As long as the financing costs are factored into your analysis (interest, points, inspection fees, draw fees, etc... <-- All of which are negotiable for the right deal) and the deal still make sense I don't see any harm in it. Having the additional capital available as a reserve or for other investments would likely provide an equivalent or better return. I would just be certain you fully understand the draw schedule and have clearly defined points at which draws will be paid as this will allow you to ensure you structure your contracts with your tradesman to ensure you are staying ahead of the money.

Taylor L. · Answer

If you have the right Hard Money Lender, they're another set of eyes looking at the deal. My area has one in particular who has built a very nice business, and knows the flip biz in Richmond inside-out. For people just starting out, an extra set of eyes isn't a bad idea. That said, not all extra sets of eyes are created equal.Would you be running these deals on your own, or will you have someone in the area participating as well?

Kris Marmol · Answer

@Daren H. That makes sense, thank you for the recommendation as well. I will definitely look them up. I’m actually interested in the Texas market as well, right now we are looking in Kentucky. One of my business partners has properties in Texas, maybe there will be an opportunity to go in on a deal together.

Daren H. · Answer

@Kris Marmol I have only used two HMLs, and this is recent for me (2019). One is in Texas. The other is more national. I used Iron Bridge Lending on a recent deal. They were a little higher in interest rate, but lower on fees and extremely faster on process. They made the process pretty simple. They funded 2 deals for me. Obviously I came to the table with some REI history and solid deals. They are pretty well known and probably a sponsor of BP.It has been pretty easy to refinance. I did run into an issue early in my BRRR life. I used cash to purchase. I got the cash off my 0% interest credit card offers (had a couple of cards with $30K - $60K limits). Didn't realize that this would cause a big drop in my credit. This affected my refi. Went down under 720. Luckily I had cash to pay down cards (but this tied up my cash). Make sure you don't do anything that impacts your credit downward.

Kris Marmol · Answer

@Daren H. Thank you very much for the input, that was excellent advice. That sounds like what we are planning to do and with the use of a hard money lender that lets us do 10% down and then 100% of the financing for the rehab. Thank you for explaining how it works to be reimbursed. Would you recommend any Hard money lenders that operate in multiple states?Also as far as conventional financing goes have you found it it’s easy or difficult to get a bank to refinance the property? Assuming that credit and income should qualify as the guarantor.

Frank Geiger · Answer

HM is expensive. I stopped using it because it was killing most of my deals. You can do more rehabs at once. The less money you have into the deal the more cash you have for other properties. You won't have to pay for the inspection draws. You may or may not have a construction complete no later than date (which costs more money to extend). HML have minimum amounts for loans so you may not qualify if you pay for the construction out of pocket. Also, be careful they don't jack up or add in other junk fees.