Does it Make Sense to Buy Rentals With Hard Money?

Question

Does it ever make sense to purchase a Buy & Hold property using hard money? If so how do you eventually get the hard money lender paid back if you're simply renting out the property and not flipping it. Would you at some point just refinance the property into a conventional loan? How could you do this if there wasn't a lot of equity, but the property was cash flowing over $300 a month? I've been running the numbers on houses as rentals and I have found some very good prospects, but I don't have the money to purchase the homes outright or the 20% down payment for conventional lending. Want kind of incentives could I offer to private money lenders to help me acquire rental properties? What would the structure of these deals look like? Thanks!

Mike Buchheit · Answer

The first several can be the hardest. Have to get very creative on source of hard money. No wrong answers. LOC, credit card, family, friend. I typically go after properties I can buy $0.60 on the $1. Then put $.20 on the $1 into rehab. Leaves me 20% equity and the bank will finance up to 80%. No money out of pocket -- go to the next. Two deals per year for 24 years and 48 properties later I have close to $1M net worth in real estate and still growing.

Greg Scott · Answer

Yes. Absolutely yes.You buy properties using hard money when they are distressed assets. Usually no bank will lend on them. Hard money lenders will lend both on the acquisition and fund a portion of the rehab. After the rehab is complete and a tenant is in place, simply do a rate & term refi.Here is a live example. Purchase price $70K. Rehab $25K. ARV $120K. Borrow $84K hard money to buy. Refinance that later into conventional. Total out of pocket ends up being under $20K on a $120K asset.@Jeff Montanya I see you are near DFW. Please consider joining Lifestyles Unlimited. They have an office in Las Colinas and several live classes every month. You will learn how to do this. I live in Michigan, but fly into DFW to take classes there!

Lynn Dee Murrow · Answer

@Jeff Montanya I am the EVP of Lifestyles Unlimited (always like to disclose that up front here on Bigger Pockets. our team will always let you know we work for lifestyles Unlimited).If you are buying a distressed property, hard money or private money is a great option that typically reduces your cash out of pocket and increases your return on investment. If you go into the closing with all your plans in place including a well thought out scope of work, a contractor ready to start work the day after you close, and your re-finance lender ready and waiting on your file from the hard money lender you can be out of hard money in 45 days. Even a large rehab can be completed in 30-40 days, you schedule the re-finance appraiser for the day of or day after your final rehab walk through and you schedule your tenant to move in the day after that.Hard money lenders are easy to find if you get involved with investor groups, and there are some great referrals right here on Bigger Pockets! Your affiliation with the group is usually enough to not have additional requirements for being new. You can find out more about Lifestyles Unlimited from @Greg Scott who has been a member for a long time. Just google our name if you are interested.You will get a lot more great input right here I am sure.

Roger S. · Answer

I have a North Texas bank that will do in house financing at 15% down if you're interested.

Peter Mckernan · Answer

@Preston PattersonHard money is 20% down or maybe 15% down. So you will need that downpayment. Bank will take money out of your refi if you are doing cash out and you will have to bring cash to the table for rate and term refi

Brandon Burke · Answer

Hello David. I am interested. I am in Georgia, looking to purchase my first property. Currently searching for best financing option.

Jeff Montanya · Answer

Thanks everyone for your comments! @Mike Buchheit that is truly inspiring! @Greg Scott Can you send me a DM to talk a little bit more about Lifestyles Unlimited? The classes must be really good to fly in from Michigan!

Patrick Galvin · Answer

going back to the example, how much does the hard money lender want on top of the 84k they invested into your venture, when you essentially buy them out and pay off the loan?

David Weintraub · Answer

There are HMLs with buy/hold loans where you can use a straight HMLoan, and then refi into a longer term if you can’t get bank financing. I can walk you through this if interested

Melvin List · Answer

@Jeff Montanya yes but there are better options out there depending on your specific situation