Using Hard Money Lenders to Then Refinance for Long Term

15 Replies

Hey Bigger Pockets fam! I have been doing a lot of research lately on how I want to jump into the real estate investing game. I’m 100% sure House Hacking is what I want to do for my first property, but it’s getting the first property that has me stuck. Living in Chicago, multi unit building are literally everywhere but the further north you go, the more expensive it gets. I’m noticing a trend where there are places that are up and coming and I’m trying to get in the area before property value goes way up. So finally here’s my question... if there’s a 2-flat building for sale at $160k that needs a little work, I can get a hard money lender to loan me the amount to not only purchase the building but also to do the rehab. Most places I’ve seen that do this give you 75% of the after rehab value. Most buildings that are similar in the area are going for around $300k-$330k. So basically I would get a loan for around $225k. That’s to purchase the building and have money for the rehab (about $65k). Now the part that’s tripping me up.... once all the work is done and I want to refinance for a long term loan and pay the hard money lenders back, what’s the amount of money I get the long term loan for? The new appraised value of $300k or that $225k I got loaned to me from the hard money lender? Because what if I can afford a 30 year $225k montage but not a $300k 30 year mortgage? My apologies for the long scenario but rather than google a billion articles that I have been I thought I’d come to you all for some help... thanks!!

@Derrick Casson Greetings,

The 'traditional' lender is only going to lend you a percentage of appraised value as well. The 'traditional' lender will also determine what you can afford by analyzing your credit score/profile and your debt-to-income ratio. I would highly recommend you have that refinancing piece lined up before you do the deal. Start calling around and/or visiting your local banks to see what their lending criteria is and try to get preapproved if possible. A preapproval will also look good to your HML because he/she knows you have the ability to cash him/her out.

Happy investing! Peace!

@Derrick Casson
They will lend you 70% to 80% of the new appraised value. Also referred to as ARV - After Repair Value.

So 70% of a $300k property would be $210k.

@Derrick Casson As a first time investor looking to house hack in an expensive market I would definitely recommend looking into a 203k loan as an option.

Although probably not as expensive as Chicago, my market here in Connecticut is somewhat expensive in the more desirable areas for a first time home buyer and owner occupant clients of mine have leveraged the 203k loan to be able to obtain multi-family houses in neighborhoods that were desirable to them that otherwise they probably would not have had a shot at purchasing.

There is a lot of info online and on the forums regarding 203k.

@Derrick Casson @Kyle M. answered your question. I just want to jump on and say that this is probably the worst time in over a decade to "jump into the real estate game." Buying in an up and coming area in hopes that prices will go up is speculation.  You should buy something that cash flows on day one. 

Maybe prices will go up, but what if they don't? They could go down. If you disagree with that statement, I would encourage you to get better educated before borrowing money in hopes of getting rich. If the 2 flat is such a great deal, why hasn't a more experienced investor with cash already bought it? Things almost never go as smoothly as we imagine they will.

Originally posted by @Anthony Dooley :

@Derrick Casson @Kyle M. answered your question. I just want to jump on and say that this is probably the worst time in over a decade to "jump into the real estate game." Buying in an up and coming area in hopes that prices will go up is speculation.  You should buy something that cash flows on day one. 

Maybe prices will go up, but what if they don't? They could go down. If you disagree with that statement, I would encourage you to get better educated before borrowing money in hopes of getting rich. If the 2 flat is such a great deal, why hasn't a more experienced investor with cash already bought it? Things almost never go as smoothly as we imagine they will.

 Someone commented in the forums the other day that "now is the best time to buy in Newark (NJ)..." I'm not so sure I agree with now being the best time for that.  I'm looking at markets that didn't depreciate/appreciate much in the GFC, and can still cash flow.  Places that seem to exist outside the rest of the world, so to speak.

@Derrick Casson , someone mentioned it earlier, I think a 203K loan would be in your best interest. Most hard money lenders will give you money for the short term, sometimes even 3 years, but the interest is high. 203K loan is an FHA type loan and carrier a much lower interest rate and will help fund the repairs. There will likely be more paperwork but if your analysis and you have the time it is a good option.

@Anthony Dooley , as for Bitcoin Mania, many people are making quite a bit of money--just like everything else; where there is lack of knowledge, there's much money to be made. With a purchase I made in Christmas, I doubled it yesterday, I view it as accelerated penny stocks. They might have the longevity but I rather be there before the lightning its the bottle, and out before it all comes crashing down.

@Carl Lee Bitcoin was $15,625 on Christmas Day and today it is $15,022.  Just like Real Estate, when it is the hot new thing that everyone is jumping into, it's too late. 

Originally posted by @Anthony Dooley :

@Carl Lee Bitcoin was $15,625 on Christmas Day and today it is $15,022.  Just like Real Estate, when it is the hot new thing that everyone is jumping into, it's too late. 

 I assumed when you said "Bitcoin Mania," you meant Cryptocurrency, my apologizes.

Bitcoin isn't the only cryptocurrency, and there's plenty of other alt coins that have performed well in their short life span. I've invested, and it reminds me of my day-trading days.

When you have loan on your property and you want to cash out you have to wait 6 month. You can refinance any time after rehabbing with rate and term.  Any lender can help you for calculations of both loan amount based on your loan scenario.  Start working with your lender  so you know what will be future payment. 

@Eric H. @Kyle M. Thanks guys! That answered my question. I was just confused on what happened next. So it sounds like once ARV is determined I should start working with my long term lender to get qualified and approved for a loan concurrently so that I know for sure the HML will be cashed out.

@Michael Noto I did look into getting a 203k loan as well.. I'm just exploring my options and leaving no stone unturned so that I can make the best decision when the time comes to purchase a property. But I do agree that, that does seem like the safer option, rather than taking the risk of dealing with the HML. Thanks for your feed back!

@Anthony Dooley yea, I've heard that getting into the game right now probably wasn't the best time but I think that there will always be a market here in Chicago. I wasn't doing the HML loan in hopes that the home would be worth more, I'm buying and holding to use it as a rental property. I'd plan to rent the units out to have one unit pay the mortgage while I live in one for a while then eventually rent that one out as well to generate a profit.

I do however see what you mean as far as why hasn't any other experience investors made a play on the property if it was such a good deal. Thanks for your feedback! 

Why use a HML in the first place? With my experience, HML's still want to make sure you have skin in the game. Why should they lend to you? What other assets do you have? And I can guarantee without prior deals in your back pocket, an HML will not give you that much money. The only time it is a good idea to use a HML is if you need cash fast because you came upon an incredible deal that just hit the market (or off market) that you know will be snatched up in a day. When time is against you than you use a HML. But if it is not, why not just use a traditional lender?

@Michael S. Very good point. It may be better to go with a 203k loan if I’m not pressed for time. But I was just asking questions to better understand how HML worked. I want to explore all the options when it comes to financing my first property and make sure I choose the best option.

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