Hard money to conventional question

[Kenneth B.]

Hello all, after what seems like countless hours of prep I am ready to make a move! My intent is to pick up some rentals and create some cash flow.

I Just received a pre approval from a bank for 200k with 20% down. I have read some posts about using hard money for the purchase and doing a refi with a conventional loan once the loan is seasoned.

So I understand if I use, say 10k per property for closing, I can get more properties with my savings. My question is will it be harder to get conventional loans after the first? Will being over leveraged be a red flag? I would hate to have a hard money loan and find out I cannot refi the property. I guess thats where the multiple exit strategies come into play.

Thanks in advance for any input

[Jon Holdman]

I think you question is "if I buy with a hard money loan, then refi into conventional, can I buy more properties than if I just buy with hard money? And, how does my DTI work once I start buying?"

So, two part question.

First buying with hard money then refi vs. buying directly. I don't know what prices vs. rents are in your area, but a $200K rental is on the expensive side. You need a pretty hefty rent to make that profitable.

If you buy with a conventional loan, you'll put in the 20% down plus your rehab costs. Note that if no rehab is needed, the hard money then refi isn't really viable because you're not doing anything to improve the value. But if you find a property where the purchase plus rehab cost is, say, 75% of the ARV (value after the rehab) then you might be able to get in for less out of pocket. That ratio, (purchase + rehab)/ARV is key. I'm assuming your HML will lend based on ARV, not just your purchase price. That ratio needs to be low so your cash out of pocket can be reduced.

Its hard to do an example without knowing what terms you might get. HMLs tend to vary a lot. What you need to consider is how much the HML will lend vs. your purchase plus rehab, the points the HML charges and then the very high interest payments you will have until you do the refi. Compare that to the cash out of pocket for down payment plus rehab for going purely conventional.

You probably want to plan to hold the HML for a year before the refi. You might do it quicker, maybe not.

As far as DTI, initially rentals will hurt you. The rental income will be ignored for qualifying for the next loan until you've been a landlord two years. That's usually taken to mean having rental income on two tax returns. Then a lender will look at your tax return. The interest on the loan is just another expense for the rental. If the rental is on net profitable, i.e., rents collected less all expenses (including interest), is positive, that adds to your income and helps your DTI. If the rental is on net negative, it hurts your DTI. Savvy lenders will know to add depreciation back on, since that's not cash out of pocket. Not all lenders are savvy.