Heloc Vs Hard Money Loan

[Damion Brown]

Apart from the difference in interest rates. I'm looking for some feedback; Between a HELOC or a Hard Money Loan which would be the better option ? My ultimate goal is utilize the BRRRR strategy in acquiring a property in Philly, this would be a out of state venture for me. Ideally I am looking to keep the purchase and renovation cost between $175-200K.

[Ty Coutts]

Hello Damion Brown,

When deciding between a HELOC and a hard money loan for your BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy in Philadelphia, there are several factors to consider beyond the interest rates. Each option has its pros and cons that can impact your investment strategy and overall success.

HELOC (Home Equity Line of Credit)
Pros:
Lower Interest Rates: HELOCs typically offer lower interest rates compared to hard money loans.
Flexible Terms: You only pay interest on the amount you draw, providing flexibility in how much you borrow and when.
Revolving Credit: As you pay down the principal, the available credit replenishes, allowing you to use it for multiple projects.
Longer Repayment Periods: HELOCs often have longer repayment periods, which can make managing payments easier.

Cons:
Qualification Requirements: HELOCs require good credit and sufficient equity in your primary residence.
Secured by Your Home: Your primary residence is collateral, which means a default could risk your home.
Variable Interest Rates: HELOCs often have variable rates, which can increase over time.

Hard Money Loan
Pros:
Easier Qualification: Hard money lenders focus more on the property’s value and potential rather than your credit score.
Speed of Funding: Hard money loans can be approved and funded quickly, which is beneficial in competitive markets.
Flexible Use: These loans are designed for real estate investments, making them suitable for purchase and renovation costs.

Cons:
Higher Interest Rates: Hard money loans typically have higher interest rates and fees compared to HELOCs.
Short-Term Loans: They usually come with short repayment terms (often 12-24 months), requiring a quick turnaround on your project.
High Fees: Origination fees and other costs can add up, increasing your overall project expenses.

For a BRRRR strategy, a HELOC might be the better option if you qualify and have sufficient equity in your primary residence. It offers lower costs and greater flexibility, which can be crucial when managing rehab projects. However, if you need fast access to funds or have difficulty qualifying for a HELOC, a hard money loan could be a viable alternative, especially if you have a clear plan to refinance quickly. I hope this helps you out. Feel free to message me with more questions as they come.