BRRRR With Hard Money

[Timothy Dail]

Hello, I'm 24 years old and a college graduate that is looking to get into real estate investing. I specifically want to get into buy and hold investing and I want to implement the BRRRR strategy. I have great credit, no debt other than my mortgage, and some in savings but not nearly enough to cover a BRRRR. I am looking into using a hard money loan to fund the deal.

First of all - Is this a good idea for a new investor? 

Secondly - From my understanding once I cash out refi and pay back the hard money lender plus the interest I would be back to square one correct? I would have to take our another hard money loan to fund the second deal right? Or am I missing something? 

Any thoughts or advice would be greatly appreciated. Thank you.

[Evan Polaski]

@Timothy Dail Take my comments with the fact that I tend to be fairly conservative:

HML are expensive. Typically 12% interest, and they will charge that on the entire capacity, even when you haven't drawn all of it. For a new investor, I would look for other sources of capital, and ideally use cash that does not have strict timelines and interest payments on it. A rehab is risky in and of itself and using expensive money to finance it only deepens that risk.

You are correct in your assumption. When you complete the rehab, and get the property rented, you will refi the property. The new mortgage will pay off the HML, and any excess loan proceeds will go in your pocket. I will note that each HML I have used (only 2) require you to keep your interest payments current during the project, so there won't be much accumulated interest at payoff.

A couple items that might be missed:
- most conventional lenders (your refi) will require 6-12 months seasoning on the property before lending on new value.  So regardless of rehab timeline, I would plan to have the hard money loan out for 12 months and needing to maintain your monthly interest payments. 
- Secondly, appraisals without an arm's length transaction behind them (read: sale) are notorious for coming back light.  On many of my rehabs, they came back 15+% lower than what I believe I could sell the property for.  You can contest these, and maybe get them up a little, but you will have to basically take what the bank says at refi, since you will likely be coming up against maturity on the hard money loan, and the fees to extend a hard money loan can be quite aggressive.