Ways to use a hard money loan BRRR

[Marcos Collazo]

Hi I'm looking to purchase real estate within a year or two. I'm in the Air Force so I have access to the VA loan to buy up to four units at once. But this post isn't centered around purchasing residential properties. So from what I've been watching on YouTube by people like "Grant cardone" etc, they don't use their own money when it comes to purchasing big deals. They use other peoples money, pay them interest on it, then take control of the property. I clearly don't have a fund like he does but wouldn't this be the same as getting a hard money loan? I'm getting money from others and paying interest on it. I'm not going to go straight to commercial real estate, I'm definitely going to do my due diligence and learn real estate first before I jump into anything.

Just for fun, I've been analyzing apartment deals just to run numbers and see if these deals would work. For example, (I'm making up numbers) let's say I have to put 25% down for an apartment complex that has 100 units. Of course I won't have the cash to do this. Im thinking a hard money loan would be my best option. I've been researching some hard money lenders in my market and I actually found a reasonable lender. For BRRR method they go up to 3 years and of course interest rate will be around 9%+ which is fine with me. Why? Because I'm not using any of my money. So in general would this be a good option? They cover the down payment + extra for renovation costs (if needed), and I finance the rest with another lender. I hold the property for 3 years, increase the rents at some point, hold onto the cash I get after all expenses including mortgage payment and hard money loan payment just in case the property doesn't increase in value as much as I thought. After 3 years refinance, pay off hard money loan and I take control of the property. This is all hypothetical so I might be missing something.

Questions:

1. Is this realistically doable?

2. Has anyone ever done this to purchase commercial real estate preferably apartment buildings?

3. Am I missing anything? I’m clearly inexperienced. 

4. if for whatever reason I cannot pay the hard money loan company back, what would happen? Would they just take the property for themselves? Will they take my other assets prior to working with them? 

Thank you all for replying.

[Doug Smith]

Hey @Marcos Collazo, I love helping the brave men and women who serve. One of my loan officers is in your neck of the woods and is a combat vet. I'm proud to have him on our team and we love helping service members in their real estate endeavors. 

First, let me caution you on some of the gurus and their "creative financing" techinques. Some of them are sketchy at best and, in some cases, there are legal questions that center around them. Some of these gurus also find themselves in lawsuits (and are involved in them right now) for making false claims. I beg you to take what you read from them with a grain of salt. Most of them are better at selling courses and snake oil than they are at doing actual deals. 

Now that that's out of the way, let's get to your deal. Boxers tend to start with small fights to hone their craft before stepping into the ring with Mike Tyson. A huge apartment building is Mike Tyson for someone just starting out. I think starting out with a Duplex, Quad, or a Single-Family is a great idea, but heading straight to a 100-unit building might be a big deal. Yes, I'm primarily a lender, but we also invest in real estate. My wife runs the show with that. I came in with, at the time, more than 20 years of financing real estate investors and my wife has a formal degree in design and construction experience. We made several mistakes in our first 7 - 10 deals. There are just things you learn when you're doing it that you can't learn by watching HGTV or reading books by gurus who are much better at selling courses than doing actual deals. I woud strongly suggest starting much smaller, partnering with someone who has some experience, and really hone your craft. Soon enough, you'll get your title shot at a 100-unit...but "patience Daniel-san". 

As for hard money, that won't work here. You'll need a sizable amount down for that. A bridge loan (what we call hard money) is a temporary, not permanent loan, that is going to be even higher than the 9% you mention. It's meant to "bridge" the time from acquisition through renovation...then you can refi it into permanent financing, but a lender is going to want a sizable amount injected into the deal.

Let me know how I can help. You serve to keep my family free to do real estate deals. If I can provide advice to help you I would be honored to do it.