Hard money for first investment

[Dean Murray]

I'm looking to get into the BRRRR method of investing but with have to wait a year or two to save enough to try to buy with cash. Is it foolish to use hard money for my first investment? I'm ok with the risk but I've never used hard money and I'm unsure what exit strategies I would have if it goes off the rails.

[Richard Loniewski]

I did, use hard money for all my deals. Actually a legit lender will vet the deal as well and won't lend to you if the numbers don't work. Nothing is 100% guaranteed, you need to take limited risks to succeed in this business.

[Eliott Elias]

Hard money should be in your lending arsenal. It is a crucial way to buy distressed property, you can close quick, with a LLC, and little down payment. Never plan to hold for more than 6 months

[Nathan Gesner]

I agree. Hard money can be an option, but you don't want to hold it long at that high interest. Use it only for deals that are really strong and can refinance the loan within 6-12 months.

[Joel Link]

Hey Dean, why are you looking to buy the property with cash? Is it a mortgage qualification issue?

[Manny Vasquez]

@Dean Murray Hard money loans can be really good, however, they can also be really bad if you don't read between the fine lines. There are some great HML's out there and there are also some sharks. Make sure your lender spells out all the details. What is the interest rate? When and how do you receive the money for your BRRRR? What are the terms? Is there a pre-payment penalty? etc. Typically, you want to rehab your property as fast as humanly possible so that you can refinance yourself out of a hard money loan and into a much more favorable home loan. I would highly recommend that you speak with 3-4 HML's to see what they offer. You can always share the details on these forums so that people can chime in and help you determine if its a good deal. Good luck!

[Dean Murray]

Quote from @Joel Link:

Hey Dean, why are you looking to buy the property with cash? Is it a mortgage qualification issue?

I’ve been going through David Greene’s BRRRR book and this is the course of action he recommends. I’ve read up on other methods and I’m unfamiliar with HML’s so I’m trying to gauge the risk in going that way

[Gabriel Graumann]

@Dean Murray I've completed investment purchases with both cash in hand and hard money loans. This said, I would advise AGAINST starting off your investment career with a HML. We've read the same books and heard the same advantages to using "other peoples money" to invest. Yes, it allows investors into the market more quickly and/or scale more quickly. However, there are huge drawbacks to utilizing HML's beyond the fees, high interest rates, and often tight timelines. There are lessons to be learned for investors that only come taking it slower.

The most overlooked and underdiscussed problem with HML's or similar debt is the compounding effect that they bring into the investment equation and outcome. One main effect is borrowed money actually LIMITS your exit options, not increase them. For instance, I purchased a property with cash on hand in mid-July of this year for use as a daily rental. The intention going in was to purchase the property for cash, make improvements and furnish the property, then refinance it into a permanent long-term loan. Fast forward 2 months and rates continued to rise very quickly for all loans, but especially so for investment loans with the average quotes coming in at upper 7-8% range. Had we held a HML for the acquisition costs with a timeline running out in a 3-6 month window, we would have been forced to refinance with a high interest loan with terms that were not advantageous across the board. Then we'd need to refinance again down the road 12-18 months, or whenever rates were more advantageous and pay another round of fees for the privilege. Instead we have kept the property in cash, and tapped some of the equity via a HELOC with a 5% year 1 interest rate. If another deal comes we'll have the HELOC funds to use, and if not, we aren't losing 7-8% having a note out there.

[River Sava]

Hi Dean- You can go through hard money, but I agree with the others, you don't want to hold onto it for a while. Would love to discuss further with you.