Hard Money vs. Private Money -- Scenario

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Hard Money vs. Private Money -- Scenario

Steve M.
Realtor · Gallatin, TN · Member since 2009 · 292 posts · 164 votes

Let me start off by saying BP is GREAT! When I wake up from a dream thinking about real estate, I know something MUST be good ...

Here's my situation. Would love to hear thoughts from some of the *locals* :D Thanks for any and all advice in advance.

Facts:
I have roughly $200k in Private Money (my own) to get started in REI. Mainly looking to Buy & Hold, starting with several SFR's.

Hypothetical Scenario:
Lets say I find a home.
ARV is roughly $150,00 - $160,000.
List is for $95,000 (short sale/fore)
Rehab: $5000 - $10,000
Rents: $950 - $1100

Now, I would love to close on something like this quick. Assuming I pay from my own private funds, I can than go out, and refinance for roughly $70% LTV. Is this correct?

Now, if I have private money, there really is no point in going with hard money only to refi later, right?

Just trying to work out some of the kinks in my understanding!

Thanks!

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y

If you buy a dumpy property, and fix it up, you will be able to do a refi based on a new value.

There are a couple of gotchas.

You say private money, but you really mean its your own money, if I'm understand correctly. So you mean you're paying cash. You want to do the refi to get your cash back. Trouble is this is a "cash out" refi. Those are harder to do than a "rate and term" refi where you're paying off one loan with a new one. A cash out refi of a NOO (non owner occupied) property based on a new appraisal is probably the toughest loan situation. It may take a year's seasoning to make that happen.

If you were paying off one loan with the new one, it would be easier. One member recently described a strategy where he and a partner both had their own money. Instead of each paying cash for their deals, they loaned each other the money. That puts a documented loan in place, and makes the refi a rate and term refi rather than cash out.

Here's my jaded take after being jerked around on listed short sales. If there is a negotiated, agreed-upon price with the bank, that is, a price the bank has agreed to take, and that's a good deal, offer that price. If there's no agreement with the bank, its unlikely you'll actually get an agreement. If the owner is a homeowner in distress, you could try for the deal. If the owner is an investor, forget about it.

Do not provide earnest money up front. Give the amount of earnest money you will provide. State the earnest money will be provided in certified funds within 72 hours of the contract being accepted by the bank. The seller's signature on a contract means nothing. You only have a deal if the bank signs. So, don't get any money tied up in a deal where the real deal maker hasn't signed.

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  • Josh Green
    Financial Advisor · Tampa Area, FL · Member since 2008 · 956 posts · 214 votes
    17y

    you would be able to go and get a loan for 70% of the purchase price.

    you cannot go out and immediately refi for 70% of the value due to seasoning issues.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    If you buy a dumpy property, and fix it up, you will be able to do a refi based on a new value.

    There are a couple of gotchas.

    You say private money, but you really mean its your own money, if I'm understand correctly. So you mean you're paying cash. You want to do the refi to get your cash back. Trouble is this is a "cash out" refi. Those are harder to do than a "rate and term" refi where you're paying off one loan with a new one. A cash out refi of a NOO (non owner occupied) property based on a new appraisal is probably the toughest loan situation. It may take a year's seasoning to make that happen.

    If you were paying off one loan with the new one, it would be easier. One member recently described a strategy where he and a partner both had their own money. Instead of each paying cash for their deals, they loaned each other the money. That puts a documented loan in place, and makes the refi a rate and term refi rather than cash out.

    Here's my jaded take after being jerked around on listed short sales. If there is a negotiated, agreed-upon price with the bank, that is, a price the bank has agreed to take, and that's a good deal, offer that price. If there's no agreement with the bank, its unlikely you'll actually get an agreement. If the owner is a homeowner in distress, you could try for the deal. If the owner is an investor, forget about it.

    Do not provide earnest money up front. Give the amount of earnest money you will provide. State the earnest money will be provided in certified funds within 72 hours of the contract being accepted by the bank. The seller's signature on a contract means nothing. You only have a deal if the bank signs. So, don't get any money tied up in a deal where the real deal maker hasn't signed.

    1Reply
  • Arlene Eckert
    Northern New Jersey · Member since 2009 · 43 posts · 65 votes
    17y

    Josh

    I just have to say I love that pic! What a contender...

    0Reply
  • Josh Green
    Financial Advisor · Tampa Area, FL · Member since 2008 · 956 posts · 214 votes
    17y

    thanks arlene!

    that's my daughter...turned 6 months just last week. i can't believe how fast she is growing!!!

    that pic was taken a couple of months ago after i gave her a bath for the first time by myself (no help from mommy!) lol
    she was very patient with me and had that look on her face as if she felt bad for me...lol gotta love her!

    thanks again!

    0Reply
  • Eve Elomina
    Real Estate Investor · San Diego, CA · Member since 2008 · 7 posts · 1 vote
    17y

    Steve, I highly recommend you use leverage and minimize your own money in the deal. You can keep your 200K or almost all of it, find home run deals and duplicate over and over. You run the risk of tying up your funds, losing your funds and limiting your ability to invest and spend your own money. You could easily collateralize that cash too and get a private money loan. I also caution you about the deal, their are smoking deals out there everywhere. I recommend only doing deals with strong exit strategies, preferably multiple exits. 50% LTV and rents that are 1.5-3% of purchase.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    17y

    Steve,
    The other factor everyone left out was in your hypothetical numbers. Paying $90k + $10k for a total of $100k and getting only $950-$1000 in rental income is a loser investment each month.
    Also, as Jon kind of mentioned, private money (private financing) refers to a private individual loaning money to another investor who in turn buys real estate. For instance, you could loan me your $150k and I would pay you 10% interest on that money and it would be secured by the RE. In other words, you would be my bank. Why would i pay you 10% when I can get a loan for 6.5% right now? Because the availability of funds is more important to me than the cost.

    Podcast Guest on Show #130
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  • Steve M.
    OP
    Realtor · Gallatin, TN · Member since 2009 · 292 posts · 164 votes
    17y

    Jon,

    I really appreciate you laying everything out to me! Really helps me understand it now!

    Ryan!

    Definitely ... After another 48 hours of research, I finally fully comprehend the 2% - 50% principles! The last thing I want to do is tie up all my funds when a smokin deal drops in my lap! For our first deal, we may end up going with a HML then transferring that in to a Conv type loan, or may do what Jon suggested, and having our Friend *fund/loan* then take out a conventional loan off of that :) P.S. -- We just moved from So Cal, my parents own a rental in Oceanside! BEAUTIFUL doesn't even begin to describe the area!

    Will

    So private money is essentially the same thing as HM? Instead of a bank note, you are working with hard funds by an individual/group of individuals?

    Also, do you happen to know Greg/Stephanie Cox ? They are realtors (atleast Greg is) in Canyon Country :)

    Thanks for all your help guys!

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    17y
    No, not quite. Hard money is different in that the HML will want to check your credit worthiness, will want you to have a specific amount of skin in the game (your own funds), will only lend up to a certain LTV, will usually charge at least 12.5% ineterst these days, will want points (usually a minimum of 3 points) and the terms rarely go past 12 months. Also, they will require an appraisal, escrow, closing costs, etc.
    A private lender is basically someone whom you as an investor can borrow from based on your "experteise" in your field, their trust in you (or at least the deal must be outstanding) and there are no points to pay, no escrow or closing costs, no appraisals, etc. Also, I have borrowed on private financing for terms in excess of two years.
    Most of my private lenders started out to be family, friends, and acquaintences. After I developed quite a track record, the word spread to others. I also market fro them in many ways such as to self directed IRA owners and people with 401k's sick of the stock market. I offer guaranteed rates of returns and their principle is secured by the real estate.

    Not persoanlly, but I know of Greg Cox's name in the biz here locally, just can't place where right now. How do you know them?

    Podcast Guest on Show #130
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