Refinancing Hard Money Loan

[Ricky Chau]

Hello Fellow BP Members. Hope everyone is well & safe!

I'm trying to wrap my head around how one would refinance a hard money loan into a 30 year conventional mortgage loan.

It seems obtaining a conventional loan (non-owner-occupied) for a rental property investment is difficult, which is why people use hard money.

So why would a mortgage lender refinance a property say 1 year later to an investor (non-owner-occupied)?   Am I missing something here?

[Cameron Rockwell]

@Ricky Chau

The goal with hard money is to add value and therefore add equity. If you find a house and can add more value by repairing it than that would be adding equity, as long as the repair costs are not more than the added equity/value. The strategy you are referring to is called the BRRRR strategy. There is tons of info on it that you can research to figure out how it works but to answer your question here is a scenario.

Lets say I have a house I want to buy for $100,000 dollars but the house is going to require $50,000 worth of repairs. Talking to an agent and running comps in the area I have determined that totally fixed up I can estimate the sale price to be 200,000 dollars. That means that I can profit $50,000 dollars from the house selling at the After repair value(ARV). Now with the refinance piece of it instead of selling the property I can take that property to a bank and say that I want to do a 30 year fixed mortgage on the property. Let's say the house appraises for $200,000. That would mean in theory I would make 50,000 right? Nope, the bank usually requires a 25% down payment on that property so in that case you would only be able to receive $150,000 of your initial investment. Now you can rent the property out all while putting $50,000 worth of equity in the home. This however is very inaccurate as there are other expenses such as closing costs, Hard money lender fees, and other holding costs you need to account for. This should give you the basic idea of how powerful a BRRRR really is. I do caution you to do a lot more research and have a solid team in place (agent, contractor, attorney, etc.) before reaching out to any hard money lenders. Hope this helps.