Hard Money/Private Money/Bank Refi used together?

Question

After watching the webinar @Brandonturner did yesterday, I learned that you can buy a house using funds from a hard money lender, and then refinance with bank later. I've listened to the podcast with @Annbellamy and learned alot about hard money lending (when to use them, how to find them, ect..). I just need a few things clarified and I'll be able to write a full business plan and be on my way to real estate greatness.

I apologize if this turns out to be a long post.

First, I have NO money. When I started out learning about REI I decided I wanted to Buy and Hold. I figured I needed to start wholesaling to get the cash I need. Not to get to detailed in my story, I met a guy here on BP (you could say he's my mentor) who is teaching how to do Sub 2 deals. It's a way for me to invest with no money out of my pocket (Great!), but the Buy and Hold strategy is something my mind is set on doing. I'm determine to find a way to make it work (plus I like to have options).

So here are my questions...

To refi with a bank I'm going to have to show proof of funds right? I have a job and good credit, but I don't think that's going to be enough. So I had a idea. If I raised some private money, will I be able to use that to show proof of funds (even if I plan on using it later to purchase more houses)?

Also, I know there's a limit to how many bank loans I can have in my name. I do have a partner but after we reach out limit, what are some other ways to get long term loans (other then owner financing)?

Do hard money leaders refinance?

Once these questions are answered, I'll be able to write a business plan and hopefully raise some private funding (of course ill seek out a lawyer beforehand).

Thank You

Brandon Turner · Answer

Hey Risto M. - thanks for joining us in the Webinar last night!

You may be surprised at what kind of financing you can actually get. I'd call around to a dozen different banks/credit unions and talk to them.

I'm not a real big fan of using wholesaling to save up money to invest buy and hold - simply because it's too easy to quit wholesaling. It's much harder to quit a duplex that you live in, or something like that.

Proof of funds generally means you have money to buy a property. When you go to refi - you probably don't have to have much. I mean, the bank will want to see some (I'd say shoot for $5k) but that should be sufficient. I think the rule is 6 months worth of Principle and Interest payments in the bank - so if your payment is $500 a month, $3000 would be enough. And the security deposit of the tenant, I believe, can be part of that. I'd just sell a bunch of stuff to get that and not worry about private money.

As for what to do after you hit the #10 limit for each of you (Cause some banks will do 10), at that point, the question won't be an issue. I honestly wouldn't worry about it. Because once you've got experience, it's much much easier to get financing. Financing is only really tough in the beginning. I'm not saying it's ever easy - but I just wouldn't worry now about it.

Do you own your own home already? You could always start with a small multifamily property and make that your first investment?

Just a thought!

Hans Restuccia · Answer

Ann Bellamy@Ann Bellamy is a smart lady and is very accurate in her comments above!

Steven M. · Answer

Most of the borrowers Ann never don't take it to the full 8 years, usually it's 2-4 years before they pay off the entire loan (interest only, non-owner occupier). Thanks.

Ann Bellamy · Answer

Steven M., California is the exception to almost every rule. :-)

Most HML's have only short term stuff. The longest I've heard of here in the Northeast is 3 years. 8 years is unheard of. But good for you that you have such flexible lenders.

Steven M. · Answer

@Ann Bellamy - Ann- Yes there are exceptions to rules:

My partner owns 17 single family rentals beyond 50 miles outside of Los Angeles. They are long term buy and hold situations; purchased them via short-sale and foreclosure. He uses a very well known hard money lender here in L.A. to first purchase the property with a short-term 65% LTV loan to clean the place up for rental at a 13% APR and then after that is all done he gets the house refied down to at 9% via the same hard money lender/broker with an interest-only 8 Year loan term where he rents the property out (positive cash flow or breakeven). Conventional Banks won't loan to you if you own more than four properties. Either go to a HM lender or don't buy the house. You have not much choice if you own muiltiple properties (assuming numbers work of course). As you know, dealing with banks is nearly impossible if you are a real estate investor.

The 9% program he's in ( with a 2 year min) works because he bought the property at below market price, rents support this cost and he has many others to offset any possible month to month losses he may incur (i.e., repairs, extended vacancies, etc). These borrowers do these deals in expectation of rising real estate values...and prices are rising in So CA at a 9.4% clip in the past 12 months.

So to the contrary, you can use hard money lenders for longer term refi'ing if numbers workout. The hard money lender is The Norris Group in Riverside, CA. A highly reputible and very well-known licensed(!) CA hard money broker (direct borrower to lender, NOT a pool funding of lenders). They have $25-30 million out in the street in refis, rehabs and construction loans (they do all title, loan servicing, escrow, property inspection, apraisals, etc). There are others like this company out west in CA and AZ.

What I found is that those in the HM business, it's very geographic. There are far more hard money lenders and creative HM programs the further west you go into Texas, AZ, Nevada and CA, than the east (and also south like GA and FL).

If you have multiple properties and/or own properties in high rent areas, looking for appreciation more than high cash flow, using a HM lender for long term financing at 9-11% APR interest-only loan is worth it (and most lenders would love to earn this today) for several years.

Risto M. · Answer

Thanks Ann Bellamy!

I wasn't saying I was going to use hard money for sub2 deals (didn't think would need to). I was just stating that I was learning how to do them. Now I understand that I shouldn't try to refinance with a HML, so thanks for clearing that up.

Bill Gulley

I definitely understand the importance of having exit strategies. I will seek the approval of the bank before I go through with the deal. But just in case for some reason the bank don't come through, Ill have backup plan(s) (like wholesale it). Thanks guys!

Bill Gulley · Answer

A golden rule of finance is to match the term of financing to the need for financing. As Ann pointed out, hard money is short term and should only be used for short term needs.

You really must be assured that other financing is available to you to take out short term financing or make sure you can get rid of the property within the term.

Another point, hard money is eaiser to obtain than bank financing and is a temptation for investors to use it. It can be a great way to acquire, repair and flip properties but you are taking a greater risk being under a short fuse. Make certain you have alternative exits, the ability to refinance or sell. Know who you are dealing with as well, many HMLs don't do extensions, they lend at very low loan to value levels without regard to ability to pay or credit and thier recourse is to take the property, which can be more profitable than being paid off as agreed, so beware. :)

Ann Bellamy · Answer

Risto M.

Brandon has answered your question about having cash for a refi.

As to hard money lenders refinancing, two things:

First, you should not refinance a sub-2 using hard money. Hard money is expensive and is for short term needs. It is something you might use to buy and property, and then once it's fixed up and rented, you would use conventional bank financing to refinance into permanent financing. Hard money is temporary, and will sink you over the long term.

Second, many hard money lenders won't refinance anyway. Here is why: If the existing financing is already hard money, there is probably a problem, or the lender would extend. There aren't an overabundance of good deals out there, so if the borrower is paying, the existing lender would generally extend. If he won't, there is a reason, and the new lender doesn't want to inherit those problems. If the existing financing is sub-2 or bank or conventional, the hard money is much more expensive and there is seldom a good reason to go from low rates to hard money rates. If there is a reason, its generally a problem with the borrower not paying as agreed or other problems. So again, the hard money lender doesn't want to inherit those problems.

There are of course always exceptions to these rules.

Hope this helps

Risto M. · Answer

Thanks Brandon Turner!

I'll start calling the banks on monday

Brandon Turner · Answer

Nice Risto M.!
Yeah - I'd definitely start having some conversations with a few local bankers and get them to tell you exactly what you'll need. They'll map out the road map for your financing, BP can help map out the road map for purchasing, and you are set!

Let me know how I can help!

Hard Money/Private Money/Bank Refi used together?

Hard Money/Private Money/Bank Refi used together?

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