Getting a hard money loan to purchase rental

[Carlos Rodrigues]

Good morning BP! I have a few questions concerning hard money loans and a few other financial questions.

So I'm interested in purchasing a multi family in Elizabeth New Jersey (Union County) and after going to multiple loan officers/ mortgage brokers I'm only able to borrow $235-250k. My think is okay after I borrow that money (FHA) then I'm pretty much stuck for 2 years until I can borrow more money and I don't want that!! Is there anything that I could do to keep purchasing properties if I do go FHA? FYI this would be my first property.

Then I came across BP market place and I found amazing deals on there. I've reached out to a few people who've posted them, but yet to hear back. But either way they'll most likely want cash. And that's my one thing, I don't have $100k cash. So would it make sense to get a hard money loan and pay 12% in interest on a $100k loan with the ARV of $250k with $50-75k in repairs? How would I then refi to a lower interest rate? Or would I have to pay it all off within the terms? Also would a hard money loan loan me repair costs? Maybe I need to learn a little more about hard money loans.. Any guidance or references? Thank you!!

Sorry for any typos.

[Andrew Michael]

Hi @Carlos Rodrigues

As it pertains to the hard money side of things I can help you out a little here.  First of all, realize that hard money is going to include points on top of that 12% so take that into consideration.  Furthermore, the hard money loan would most certainly build in the construction costs to the loan so you will be paying points and interest on the total loan amount and thus have more carrying costs.  Many people use hard money to do just what you are describing but you need to make sure you can refi out of the hard money loan.  Most traditional lenders will require a seasoning period of 6 months so expect to hold the hard money loan for at least that long. 

A few more things to think about are as follows.  Most lenders will require the property to be purchased an held in some type of entity.  Find out how this will effect your refi plans.  Most lenders will require the property to be delivered vacant, especially during the constructions phase.  Are there tenants currently in place?  If so, are you going to remove them prior to closing or will they be staying put?  Are both lenders aware of this?  Find out.  Lastly, and here is the catch 22, many hard money lenders do not allow occupancy during the course of the loan which makes the seasoning process hard for the back end loan.  You will need to explain the details of the deal to all lenders involved so that the appropriate measures are in place.  

Your plan is logical and makes sense it just takes a little more planning on your end.  As long as the hard money lender is confident their loan will be paid back you shouldn't have any issues.