Hello everyone! I hope you all are doing well!
Full disclosure, I am completely new to Real Estate Investing and when I say "completely new", I mean asking the most basic questions that may seem like a no-brainer for most others that have been in the game for six months or more. I live by the creed of "ask the 'dumb' question now so I won't make a 'dumber' mistake later." So here goes...
My wife and I were just plotting our path forward as we continue to research various aspects of REI. I read quite a bit about Hard Money and Private Money Lenders, as well as the pro's and con's of using them. To be completely honest, I wasn't sure if going that route would be in our best interest right now as beginners in this industry. So as a 'safer' bet, we decided that using FHA loans with a 30 year-fixed would be our best option since we intend to buy and hold. Mid-conversation, I had a strange idea.
I was explaining the benefits of a Private Money Lender (or Hard Money Lender) when it hit me. I wonder if I can use a Private Money Lender to secure the down payment on several properties and use an FHA loan to finance them? So here's how it played out in my head.
1) Get a loan from a Hard Money Lender for $120k.
2) Find five properties for $100k or less.
3) Use $100k of the $120k loan to make the down payments and keep the other $20k in reserve to cover closing costs and any minor repairs needed for the properties.
4) Get the properties rented out and within six months to a year, refinance the properties to pay off the original lender.
Now, on paper, this idea sounded really good and I assumed it would be feasible. But as my wife likes to remind me, "assumptions are the mother of all goof ups." She also doubted if it would be possible to get one FHA loan (even a jumbo loan) to refinance all five properties at once. Much less getting multiple FHA loans on each property, individually, at the same time. That could mean we'd run the risk of not being able to obtain the funds necessary to repay the original lender. So back to square one...
So what you do you think? Are we on the right track? Or are we simply overlooking something? Your input is greatly appreciated. Thank you in advance!
@Maurice Webb The problem is the term hard Money. Hard money lenders and private lenders are not the same thing. A hard money lender is a professional lender that loans to investors that he or she may not know. A private lender is generally someone who is not a professional lender but lends to you because he or she knows and trusts you.
A hard money lender will not lend unless they are in first position. The bank the is loaning most of the money also expects to be in 1st position. Now if you use a private lender then it is whatever you can negotiate and get them to agree to.
Banks and even hard money lenders want you to have "Skin in the Game" In other words they want you to have some of your own money at risk so if things go bad you are less likely to walk away. So if you borrow 20% for the down payment the bank may not allow that.
I haven't read it but @Brandon Turner 's book on no or low money investing will have some good tips for you. You can get it under the store tab above.
Okay, that makes sense! So I was mixing Private Money Lender and Hard Money Lender, gotcha! I'll look into purchasing Brandon's book as well, thank you.
If you have any questions about Hard Money Lending or acquiring financing for a property, please feel free to give me a call, or shoot me an email anytime. I'd be happy to help in anyway I can! Continue educating yourself as much as you can, as I've been taught since I can remember "the lack of knowledge will always cost you money".
Absolutely, Tara. I suspect that I'll be reaching out soon.