How to Finance Next Deal: Help!

Question

I recently purchased a MFH last September and have been house hacking- used FHA and put 3.5% down. I am looking to acquire my next property this year but unsure how to finance it. I know legally I can't move anywhere for a year but I want to be ready if a deal pops up. Would people recommend to Refi out of my current FHA loan into conventional and pull out the equity? Take a HELOC? Hard Money Lender? I have a little saved up but not enough for 20%. Any advice on what people have done or thinking of doing would help- thanks!

Ben Leybovich · Answer

You are making the classic mistake of assuming that in order to take down the next deal you need your own money. It is true, you need money...but who said it has to be your money :)

Michael Doherty · Answer

@Scott Hollister That's a great method- we'll have to catch up at the next BP meetup in Rocky hill. Would love to pick your brain more about how you made the 2nd purchase.

Nghi Le · Answer

@Joseph Ambrose  I'm a flipper/BRRRRer and hard money lender in multiple states, so I can give you my take on it from both sides.

As a borrower, I treat my HMLs as my partners, especially in a new market. I depend on them to vet the deal with me, checking my numbers, making sure I have property insurance, title is clear, and the contracts are clean and in accordance with the local laws. After I close and start rehab, they send inspectors out periodically (when I request draws) to make sure that there has been sufficient progress before they send the money. I've had GCs tell me they were 50% done and wanted the next check, and the lender's inspection report comes back saying they were 25% done, and the report usually wins.

As a lender, BRRRRs can be hard. First and foremost, I'd always make sure my borrower has connected with a loan officer and gotten pre-approved before putting them into a hard money loan because as you said, the worst thing I can do is put them in a risky loan that they can't get out of.  In terms of the actual loan, hard money lenders generally run their numbers and underwrite as if it was a flip, in which case it's all about ARV and LTV.  Most BRRRR deals I see are very tight.  BP preaches the 70% rule here (where purchase price + rehab <= 70% of ARV), but the BRRRR deals I see are like 85%.  That's because most investors are looking more at cashflow.That's why lenders and borrowers for BRRRR aren't often on the same page; what's a great deal to one may seem like a risky one to the other.  HML criteria generally won't change, so you'll just have to understand the HML's policies and plan accordingly.  Know what it means when a lender offers 90% LTC up to 70% LTV and that sometimes you might have to put in 25% down instead of the 10% you were expecting.  Some lenders might not lend at all because they have a minimum margin or ROI requirement.

That's why lenders and borrowers for BRRRR aren't often on the same page; what's a great deal to one may seem like a risky one to the other.  HML criteria generally won't change, so you'll just have to understand the HML's policies and plan accordingly.  Know what it means when a lender offers 90% LTC up to 70% LTV and that sometimes you might have to put in 25% down instead of the 10% you were expecting.  Some lenders might not lend at all because they have a minimum margin or ROI requirement.

Rick Santasiere · Answer

@Michael Doherty, I would keep away from the HELOC (for now), based on your LTV.  My advice is to keep looking for deals and find someone you can use for private lending.  Sometimes when you have past relationships in your deal estate deals, it opens up opportunities. For instance, I want to do some deals this year, and I have capital.  However, I don't have as much time to engage in the activities that result in finding as many deals as I would like (I am working with my customers and their needs come first). With that said, bring someone you trust a "deal," and if it's good enough, I can guarantee financing wouldn't be a problem. Reach out any time Mike.

Andrew Syrios · Answer

It might be worth looking for a private lender and trying to do the BRRRR strategy. Just make sure you have some money in reserve in case things go over budget. I wrote an article on financing a while back you might find helpful: https://www.biggerpockets.com/renewsblog/2014/10/29/the-ultimate-list-of-ways-to-finance-buy-and-hold-property/

Scott Hollister · Answer

@Michael Doherty,

• Good. Look for creative ways to get rentals, often people look to flipping for capital. But there are creative ways to get rentals without flipping. Ive done both, but the BRRRR has done really well for me. Just as long as you can understand the financing on the backside, its not as easy as its led to be. 
• You don't really have enough equity to pull and your rate is good. I say that because my loan fees for the refi were around 4k which I rolled into the refi. In order for you to do a cash out refi into a conventional you would need to be at 80% LTV. If you had more equity, were looking to hold long term, and get rid of PMI I might be swayed towards the refi.

I was in the same position as you, needing capital for the next project. I had an FHA, found a local bank to give me a HELOC up to 100% (4-7% interest because its higher LTV) and used Hard Money at 12% IO to purchase an REO with the BRRRR strategy. I went conventional 30 year fixed and got to keep the asset while pulling out some tax free cash.

Upen Patel · Answer

@Michael Doherty With a 96.5% LTV FHA loan, you are already maxed out. No one is going to give you a HELOC (those only go to 90% LTV). You will have to save funds.

Also, keep in mind that for the next owner occupied purchase, you will need to "move up" or provide some other valid justification to meet underwriting requirement.

Michael Doherty · Answer

@Scott Hollister

1. My goal is to acquire more buy and hold properties for passive income. However, I've been thinking of doing a flip to have more cash on hand to purchase more MFH's.

2. I have 179k left on the house as I just purchased last year and about 12-15k equity and it would appraise for 192-195. Right now its an FHA 30 year fixed at 3.65%

How to Finance Next Deal: Help!

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