Refinancing to Cash Out Hard Money Loans
Hi all.
I need some advice on refinancing a rental property.
I'm going to be purchasing some buy'n'hold properties very soon. Due to my limited capital I'll need to use hard money to purchase and fix said properties for rent. What I'm trying to do now is secure financial backing in the form of refi options for when the properties are rent-ready. I plan to visit as many local community banks and credit unions as I can to have it locked up BEFORE I start looking for deals. Is this a good strategy? If not, what would be a good strategy?
Yes, you want to make sure you have the bank financing in place first before you borrow hard money.
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#2 All Forums Contributor
- Real Estate Broker
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One of the major contributing factors to the great market melt down back on 08 and 09 was the banks stopping all loans for investor refi's... it killed HML's and their borrowers. We felt this pain deeply... be very very careful with this strategy.. Most HML these days will be uber cautious about this anyway.. so you probably won't get a HML unless they are darn sure you can refi
So let me propose this angle... HML's generally finance for what, 18-24 month periods. I know a lot of banks want you to own a property for at least 6 months to a year before they will refi. What about buying, fixing up, renting, then simultaneously looking for a refi while marketing the property for sale as a plan b? This way if I have to sit on it a year I will have more than one out. What do you think?
u never said the price of the house. Im fairly new but im into houses around 30k as a small amount are move in ready where i am and that is the mortgage threshold where i am. Call the banks and take notes on their LTV. I think that is important because if the only bank u can get a loan from does a 65% LTV it may not pay the hard money loan off. I guess paying it down would beat a zero though lol. But get the average score u need to obtain the loan and closing fees etc. Also C.unions here combine financial accounts. So if u have a credit card and loan in the same bank, defaulting on one affects the other. That's what i learned in my homework as i need a lot of leverage to invest in buy and hold.
Be sure to factor in refi costs if you can't roll them into the loan. As well as potentially much higher interest rate 8 or 10% and points you will be pay, while evaluating deals.
Originally posted by @Kairaba Burson:
u never said the price of the house. Im fairly new but im into houses around 30k as a small amount are move in ready where i am and that is the mortgage threshold where i am. Call the banks and take notes on their LTV. I think that is important because if the only bank u can get a loan from does a 65% LTV it may not pay the hard money loan off. I guess paying it down would beat a zero though lol. But get the average score u need to obtain the loan and closing fees etc. Also C.unions here combine financial accounts. So if u have a credit card and loan in the same bank, defaulting on one affects the other. That's what i learned in my homework as i need a lot of leverage to invest in buy and hold.
I haven't started looking for the deal yet because I don't have my financing in place. I need to know what I have to work with in order to know what size deal I can take on.
o ok. Just get the bank info in order so u will have that at least. Like my credit union wont finance a house under 50k. U will need to kno this info ahead of time. Ive never obtained a hard money loan but ive heard that get around credit. But when u go to refi u need to kno u have the credit history to get the refi. Like if you've disputed anything on your report u will need to make sure its not active when u apply for the refi. Ask your self "how much extra can i afford to spend monthly on a mortgage?" Use a mortgage calculator and that can give u a decent guestimate of what u think u can afford. i would add an additional $90 to b on the safe side. Things like insurance and taxes may not b included probably wouldn't hurt to get prapproved to c what they say u can afford. sn:that doesn't mean u can afford it, it just looks good on paper lol. I got prequalified (different from preapproved ) for 130k but my first house was 32k because i knew i needed to leverage more properties
For a hard money lender, 12 months would be a long loan. Terms are more typically 6-9 months.
Even with a hard money lender, you usually some cash of your own. It take an exceptionally good deal and a very liberal HML to get into the property with no money of your own. And when you refi, even it the numbers work that you can refi without putting in any cash of you own, you still need cash reserves. Conventional loans require a minimum of six months PITI for the new loan, plus two months for existing properties. If you get past four mortgaged properties, you'll need six months PITI for all properties.
Originally posted by @Jon Holdman:
For a hard money lender, 12 months would be a long loan. Terms are more typically 6-9 months.
Even with a hard money lender, you usually some cash of your own. It take an exceptionally good deal and a very liberal HML to get into the property with no money of your own. And when you refi, even it the numbers work that you can refi without putting in any cash of you own, you still need cash reserves. Conventional loans require a minimum of six months PITI for the new loan, plus two months for existing properties. If you get past four mortgaged properties, you'll need six months PITI for all properties.
So I'd be better off trying to find properties to flip as opposed to using a buy'n'hold strategy early on? Also I know HML don't generally lend amounts lower than 50k. Jon, I just figured a good strategy combined with a solid deal and better than average credit would make up for my lack of solid capital to get my first investment deal done. Am I thinking on the right path?
The cash reserves requirement for long term lenders are hard to get around.
Fix and flipping also often required cash. For example, about the most liberal terms I've seen are that a hard money lender will lend 70% of ARV with four points and monthly interest payments based on a 15% interest rate. Say you can find a deal where purchase plus rehab is right at 70%. In many areas, its tough to find such deals. But say you do, the HML agrees on the numbers and you get the loan. Your loan covers the purchase and rehab costs. But you have those four points (4% of the loan amount) off the top. That's out of pocket for you. And you will have to pay any other up front costs out of pocket - appraisal, title company fees, inspections, insurance, utilities, etc. Then you have the monthly interest payments (1.25% of the loan amount.) You will also have carrying costs, such as utilities. Most HMLs will hold the rehab money in escrow, so you will need cash to pay for labor and materials, then the HML will reimburse you. If you go over budget, that's entirely out of pocket. If, at some point, you run out of cash and can't make the payments or complete the work, the HML will take the property and you'll lose whatever cash you've put into the deal. My rule of thumb would be that for a deal like this you need about 15% of ARV of your own cash.
Originally posted by @Jon Holdman:
The cash reserves requirement for long term lenders are hard to get around.
Fix and flipping also often required cash. For example, about the most liberal terms I've seen are that a hard money lender will lend 70% of ARV with four points and monthly interest payments based on a 15% interest rate. Say you can find a deal where purchase plus rehab is right at 70%. In many areas, its tough to find such deals. But say you do, the HML agrees on the numbers and you get the loan. Your loan covers the purchase and rehab costs. But you have those four points (4% of the loan amount) off the top. That's out of pocket for you. And you will have to pay any other up front costs out of pocket - appraisal, title company fees, inspections, insurance, utilities, etc. Then you have the monthly interest payments (1.25% of the loan amount.) You will also have carrying costs, such as utilities. Most HMLs will hold the rehab money in escrow, so you will need cash to pay for labor and materials, then the HML will reimburse you. If you go over budget, that's entirely out of pocket. If, at some point, you run out of cash and can't make the payments or complete the work, the HML will take the property and you'll lose whatever cash you've put into the deal. My rule of thumb would be that for a deal like this you need about 15% of ARV of your own cash.
It sounds like there's pretty much no way to get around having limited capital. Now don't get me wrong, Jon; I'm not one of these guys trying to invest with absolutely no money, but I'm starting to feel like anything less than say $15-20k is just like having no money. Thinking creatively, maybe I should consider some type personal loan or line of credit to cover this "cash on hand" need? Any other suggestions on how I can turn about 4-5k into 20k? Advice would be greatly appreciated.
Have you considered partnerships? You could use resources beyond cash and split profits. For example, you could put up some of your money, locate a deal, prove that there is money to be made, then identify a person that may have cash but not other resources. If you find a good deal, you should be able to find someone who would want a piece of it.
In addition to "partnerships," it's usually at this point in the discussion when most options have been surfaced, that someone (like me) proposes "Seller Financing" (SF) deals. SFs, depending on terms and conditions can help minimize out of pocket expenses and provides some flexibility in how you can approach and structure the deal. Of course, SF's bring there own set of challenges and considerations-
Give some details about the house you are looking to deal with. If there is not a specific deal, then make up a realistic scenario that would encompass your dream deal. Realistic does not mean the mint condition Ferrari that was found in the barn....it means a deal that is good enough to make it worth your while but not so great that 35 other investors would either find it first or pay more than you.
How much capital do you have right now? This could be cash in the bank (preferably) or other capital you could easily, quickly and cheaply access (not a HML or traditional loan).
For me...in my area....the ideal house has ARV between $70,000 and $150,000. I am a buy and hold investor. I don't flip. When I buy the house, the most I would be willing to have invested in the deal was 80% ARV and that is if it is in a great location etc. 80% is absolute max for the best of the best. If the house I was looking at had an ARV of $100,000, I would immediately subtract 20% or $20,000 since I invest a max of 80% ARV. Then if it needed $20,000 of work you would subtract $23,000 for work ($20,000 planned + 15% contingency), $4,0000 for closing costs, (1 time to buy and 1 time to refi in 6 months) and subtract the cost of capital prior to refi....lets assume $60,000 HML @ 15% with 3 points. That would be an additional $1800 in points + $4500 in total monthly interest payments for 6 months). In this simplistic example, that would mean I would pay no more than and preferably way less than ($100,000 - $20,000 - $23,000 - $4,000 - $6,300) = $46,7000.
So, with this scenario, you would get it under contract for no more than $46,700, borrow $60,000, leaving you with $13,300 to make $20,000 worth of improvements, cover contingencies etc before you can get it rented.
Once the work has been completed and you have owned it for at least 6 months, you can go get a cash out refi at 75% ltv. So, $75,000 - $60,000 gets rid of the hard money loan and puts $15,000 back in your pocket. The refi lender will want to see reserves to pay insurance and taxes for a year and at least 6 months worth of payments. That should not be hard. Just make sure your DTI and credit score are good. The numbers are simplified somewhat because I showed paying the refi costs and HML points and interest payments earlier in the subtracted values to determine max price to pay. In reality, you pay those amounts at different times in the process but still want to account for them in your calculations.
I am fortunate in that I have better alternatives than HML's so there are likely some details I left out since I have not ever dealt with one. But this should be enough to get you going and whatever HML you decide to work with can fill in the blanks or make corrections as needed. You might even want to find a small local bank that does construction loans. Better rates and options to convert to permanent financing but requires slightly better qualifications than a HML. Depending on how aggressive you want to get, how much debt you currently carry etc, there are options with 0% cash advances on credit cards (maybe an existing card or just open a new one and cash advance to yourself). You could refi your car to get extra cash, borrow against 401k or simply hit up someone you know that is willing to risk some money on you in return for above average interest. A HML is the last resort for me and so far I have been able to avoid them. They are certainly of value, but way too expensive for me.
Good luck.
Is there a way you can get more cash together? Get another job, work extra hours, cut your expenses. I know these are never popular suggestions but the question is how much do you want this. Having money in hand ("skin in the game") is going to get you better rates, help you access more financing options than if you have non, and is going to make you work harder and smarter because we're always more careful about spending our own money. Its just human nature.
Just putting this out there so you look at all possible angles of this.
Originally posted by @Wendy Noble:
Is there a way you can get more cash together? Get another job, work extra hours, cut your expenses. I know these are never popular suggestions but the question is how much do you want this. Having money in hand ("skin in the game") is going to get you better rates, help you access more financing options than if you have non, and is going to make you work harder and smarter because we're always more careful about spending our own money. Its just human nature.
Just putting this out there so you look at all possible angles of this.
Trust me Wendy, when I say I'm %100 committed... I have 3 FT jobs (believe it) but I ALSO have 4 kids (including a newborn), a new house that needs lots of work, and are getting married in two months. My capital is thin obviously, so I'm asking a lot of questions, weight all legitimate options, and getting very creative. I will get my first deal done. I have no choice but to succeed.
@Anthony Ogletree - gotcha. All the best. Hang in there. You have a lot on your plate. Just goes to show, what would have made others give up, has you energized and hunting for ideas.
Originally posted by @Chris Simmons:
Give some details about the house you are looking to deal with. If there is not a specific deal, then make up a realistic scenario that would encompass your dream deal. Realistic does not mean the mint condition Ferrari that was found in the barn....it means a deal that is good enough to make it worth your while but not so great that 35 other investors would either find it first or pay more than you.
How much capital do you have right now? This could be cash in the bank (preferably) or other capital you could easily, quickly and cheaply access (not a HML or traditional loan).
For me...in my area....the ideal house has ARV between $70,000 and $150,000. I am a buy and hold investor. I don't flip. When I buy the house, the most I would be willing to have invested in the deal was 80% ARV and that is if it is in a great location etc. 80% is absolute max for the best of the best. If the house I was looking at had an ARV of $100,000, I would immediately subtract 20% or $20,000 since I invest a max of 80% ARV. Then if it needed $20,000 of work you would subtract $23,000 for work ($20,000 planned + 15% contingency), $4,0000 for closing costs, (1 time to buy and 1 time to refi in 6 months) and subtract the cost of capital prior to refi....lets assume $60,000 HML @ 15% with 3 points. That would be an additional $1800 in points + $4500 in total monthly interest payments for 6 months). In this simplistic example, that would mean I would pay no more than and preferably way less than ($100,000 - $20,000 - $23,000 - $4,000 - $6,300) = $46,7000.
So, with this scenario, you would get it under contract for no more than $46,700, borrow $60,000, leaving you with $13,300 to make $20,000 worth of improvements, cover contingencies etc before you can get it rented.
Once the work has been completed and you have owned it for at least 6 months, you can go get a cash out refi at 75% ltv. So, $75,000 - $60,000 gets rid of the hard money loan and puts $15,000 back in your pocket. The refi lender will want to see reserves to pay insurance and taxes for a year and at least 6 months worth of payments. That should not be hard. Just make sure your DTI and credit score are good. The numbers are simplified somewhat because I showed paying the refi costs and HML points and interest payments earlier in the subtracted values to determine max price to pay. In reality, you pay those amounts at different times in the process but still want to account for them in your calculations.
I am fortunate in that I have better alternatives than HML's so there are likely some details I left out since I have not ever dealt with one. But this should be enough to get you going and whatever HML you decide to work with can fill in the blanks or make corrections as needed. You might even want to find a small local bank that does construction loans. Better rates and options to convert to permanent financing but requires slightly better qualifications than a HML. Depending on how aggressive you want to get, how much debt you currently carry etc, there are options with 0% cash advances on credit cards (maybe an existing card or just open a new one and cash advance to yourself). You could refi your car to get extra cash, borrow against 401k or simply hit up someone you know that is willing to risk some money on you in return for above average interest. A HML is the last resort for me and so far I have been able to avoid them. They are certainly of value, but way too expensive for me.
Good luck.
Thank you Chris.
I REALLY appreciate you taking time out of your schedule to offer up this great BNH financing strategy.
My ideal "good deal" looks something like this:
Sale price of 40k. 20k worth of work. ARV of 95-100k. Hold time of approximately 4-5 months tops (1 1/2-2 months worth of work). I would expect to walk away with about 15-20k after the dust settles from this deal.
This is obviously an over-simplification, but I think it's a fairly reasonable expectation for a first flip. Although this will be my first one, I am no stranger to the process (I have several years experience in carpentry/construction and I'm a numbers guy with OCD).
As I mentioned earlier, I a have limited cash reserves but I make up for it with intangibles and a will to succeed.