Using hard money to flip a house and then make it my primary residence?

Question

Hello,

Is it possible to use hard money to flip a house and then make it my primary residence?  I have my primary home which I'm planning to stay maybe for a year, I'm exploring the possibilities of how I can achieve this. Additionally, my company is already established, and it's the one I use for my house flipping.

I appreciate your help in advance!

Luka Milicevic · Answer

No - see Dodd Frank regulations.

Hard money lenders will make you sign an agreement saying you do not intend to make it your primary residence.

The reason for this is if they are lending for a primary residence then they fall under Dodd Frank rules.

If you pay off the loan and then make it your primary I believe you should be okay since there is no longer a lien on your property from the HML.

Natalie B. · Answer

We did this last year! Our intent was to sell but we ended up needing the extra space so we moved in! Started out with a HML (I believe 1 year term), reno took four months and we used a cash out refinance with a local lender to pay off HML and then moved in. We were not able to occupy the home until after the refi. Ownership went from LLC to personal names and now trust. I can’t remember the exact requirements of the refinance lender but I do know we had to be 100% owners of the LLC. We also weren’t able to profit off of the refinance like we would have if we sold but we traded for tons of equity and a larger, renovated house! Good luck!

David M. · Answer

@Bill Brandt

yeah. good point.  Its kinda messy...  And its not until after the hml could it be his primary since hml's are non-owner occupied.

But, that's kinda why I figured if you took Title in the first place under personal name, it could be called his primary from Day 1.  He was just fixing it up.

Yup, the hml has higher rate and usually points.  That's why I suggested a 203k/reno loan.

David M. · Answer

@Bill Brandt one comment --- since its a flip, he'd have a tough time declaring it as an investment.  But, couldn't OP still take advantage of sec121 if he purchased personally and used HML to start?  Its still under his name?

@Timothy Howdeshell fyi:  I just read on BP (so not sure if correct), but Fannie Mae changed Title seasoning to 1yr.  Will have to check it out...

(consult a qualified professional)

David M. · Answer

@Scott E. agreed, I think the question or issue needs to be reframed...

@Mike Romano I guess to continue..  what driving you to using hml?  Are you doing the remodel yourself?  What about a 203k or reno loan --- you just have to hire one GC to manage the remodel..

If this a "normal" deal but just for yourself, I'd say try a private money lender

David M. · Answer

@Mike Romano

Well, I guess....

Remember, hml are short term loans, about a 1 year or less, and NON-owner occupied.  So, if you refi into some other loan that could work.  Also, its usually not advisable to hold your primary residence in a company / LLC.  So, I guess you could swap Title back to yourself.  Or, just not bother with the LLC (which I'm in the camp of it being overrated at times).

If you already have a primary, what are you trying to do?  just move but buy a fixer upper?

Consult a qualifed professional.

Mike Romano · Answer

Thank you so much everyone I appreciate all this great info I would try going to try what @Natalie B. did.

Devin Peterson · Answer

Just broad strokes here without even getting into other posters comments, from the lending perspective, a HML has no tenants tied to it because its expected to be vacant for the time of construction. You are expected to refi out of the reno loan, sell it, whatever you intend to do as long as the note gets repurchased or paid off before it matures. So hypothetically speaking you should be able to refi in a primary mortgage no problem. The only issue I see is it cant be your existing primary at time of application. Another can of worms if so. Good luck! Happy to connect more with questions!

Bill B. · Answer

@David M.

It’s not really a “flip” if he intends to make it his primary home. A flip would be buy, fix up and sell to someone else to make a profit.

He can take advantage of sec 121, BUT, because it won’t be  his primary at the beginning he will only get a prorated portion tax free. This fact alone could make this plan, not considering the added costs and complications.

Let’s say he owns for 3 years and increases the value $100k before selling. I assume that’s the bare minimum for all this playing around. He would owe taxes on 1/3rd of that.

He’s also paying higher borrowing costs, and higher interest rates for a one year loan. Before starting over and getting the loan he should have gotten in the first place. MAYBE, if this is a small deal he’s only flushing $10,000 down the drain. Maybe it’s not a $50k mistake if the property’s cheap or the value add is small. But, why? What’s the upside?

Scott E. · Answer

I don't see how you arrived at that assumption...

The poster wasn't asking about how the hard money lender is paid off. They were asking if it is possible to "use hard money to flip a house and then make it their primary residence"

Using hard money to flip a house and then make it my primary residence?

Most Popular Reply