Using Hard Money for Owner Occupied Rental

16 Replies

I am planning to use a combination strategy of BRRRR and house hack for my first deal and want to use hard money to purchase the property. I was told by a few hard money lenders at a local REIA meeting that it will be nearly impossible to find hard money lenders willing to finance a property that I plan to live in. They said something about not being able to foreclose on the property if for some reason I filed for bankruptcy due to being owner occupied.

I am hoping to some of you in the BP community can tell me if this is true or not? If this is true, is this only the case if I plan to live at the property before refinancing and paying back the hard money lender? I don't see why it is an issue for me to live at the property once I refinance. I appreciate any feedback, thanks in advance!

Hard money lending takes many shapes... sounds like you talked to some institutional hard money lenders (who act much more like banks). I prefer hard money lenders that I personally know such as family, friends, or friend of a friend kind of deal. These are people who usually have extra cash that they are wanting to invest instead of people who's main income is lending money.

These kind of hard money lenders base their lending decisions on their trust in you, the property type, ROI, and time period. So, you can get a hard money loan for a live in flip, you just have to find a different type of hard money.

**Side comment** I think it is funny that many people think of hard money lenders as these super rich people with millions in cash with hard outline rules on how they need you to perform in order to get their money.... when in reality, the majority of hard money loans are just $50-100K lump sums of money that your wife's uncle is going to lend you to purchase your first flip and just wants to be  paid back in 6 months at 10%. 

Sorry, but this is dangerous advice. The reason most hard money lenders won’t make a loan like is this not because they are “super rich … with hard outline rules,” but because it’s the law.

Unfortunately, the law applies to everyone.

To add context, you’re asking for a consumer purpose loan, @Justin Tyler , as opposed to a business purpose, i.e. investment property, loan. This could mean an NMLS registration, state license requirements, compliance with RESPA, TILA (Dodd-Frank), the SAFE Act, and a whole host of disclosures and restrictions to which business purpose loans are exempt. Most private/hard money lenders don’t want to deal with this and I doubt your mom or dentist wants to either. In addition, there is the foreclosure issue you mentioned.

Foreclosing on an occupied property can literally take years, especially if the homeowner contests the foreclosure. This is particularly true in mortgage states such as Delaware, if that’s where your property is located. I know you don’t think you’d fight right now, but if times got tough, I bet you’d reconsider. Here, a good attorney would ask your lender to show compliance with all the restrictions I mentioned above. What?!?!? Your dentist didn’t follow these?

This is not to say that your mom or dentist would necessarily get caught if things went well or if you could refinance them out quickly. Is it fair to ask them to take a chance? It actually might, but I’d speak to a good lawyer on this -- with them -- and don’t try to do it yourself.

This is also not to say that there are no private/hard money lenders that make these types of loans. There are, but not many. The self-employed, commissioned sales people, anyone with good but variable income, can all have a hard time borrowing conventional money (i.e. thru a bank) and there are lenders who cater to them. Also, are you sure a bank won’t loan to you? Have you spoken to any brokers?  Is the property in that bad shape?

I know a few hard money lenders who make these loans but only locally (and admittedly in non-judicial states, where it’s easy to foreclose). You could continue to call around and might get lucky, but it will take some effort. I suggest looking through the lender list in Scotsman Guide. Also call the AAPL and ask if they know if any of their lenders will make an owner-occupied loan in your area. They have a lender directory too, but it will save you time to call. (Full disclosure, we are AAPL members but we don't make these loans.)

Best of luck to you, Justin.

I really appreciate the feedback @Jeff S. Mostly all of the properties I am looking at are in bad shape and require decent size rehabs. As far as I know, most conventional lenders prefer not to lend on properties that aren't move in ready. I have a very good salary job and plan to get pre-approved for refinancing before closing on a deal as I will need this to pay back the hard money lender.

The part I am having a hard time understanding is if I get pre-approved for refinancing (which I'm confident I will be), why does a hard money lender care about what I do with the property once I pay them back and they are no longer involved? The way I see it is I am planning to do a normal BRRRR just like tons of other people do and have done in the past. What's to keep me from not disclosing the fact that I plan to live at the property and rent out rooms (if single family)/units (if small multifamily) once the rehab and refi are complete. I am just an honest guy and would prefer to go about this in an ethical way.

The properties I am looking at are in Delaware, yes. I will definitely check out the lender resources you mentioned. Thanks for taking the time to answer my questions and help me figure this out!

Thanks for the response @Jon Reed . Unfortunately, family is not an option at this point. I do have a couple of friends that are willing to lend me some money, but I don't feel right about using their life savings without building up a successful track record first. One I add a few deals to my portfolio I have no problem with getting funding from friends/family. 

If I am unable to make this work then I might just have to go with a traditional house hack for my first property. I currently pay someone else to rent a room in their house and I want to get away from this asap. I have a good job and will have no problem getting a conventional loan from a bank to buy a move-in ready property. I was just hoping to avoid this as prices a very high right now and I will be buying at the top of the cycle.

Hi @Justin Tyler ,

I have experience in owner-occupying the BRRRR strategy and also was a lender of 2 years helping clients accomplish this exact goal. The program that I would look for in your area is a collaboration between a commercial bank and a conventional bank or find a bank that has both commercial and conventional in house. The way it works... purchase the asset using a commercial rehab program that tends to lend between 70-80% of the after repair value (ARV). This will cover the asset purchase and rehab costs, then use a conventional program to refi it into your name usually at 75-85% of the finished value, sometimes even 5%! Example: you find a distressed property for $80K. ARV = $150,000. Purchase using commercial rehab at 75% loan to value rewarding you $112,500 for the asset and rehab. Once project completed, you would then refinance into a conventional loan using the forced equity as essentially your down payment. Now you own a property with little to no money down. Call around to your local lenders to see if someone can help you achieve this. Happy investing!

Thanks for this info @Scott Hoefler ! I have never heard of this but will definitely call around and see if any local lenders would be willing to do this. I would much rather use a local bank for financing anyway as I'm guessing they will give me lower rates than hard money. For a commercial loan does it have to be multifamily, or does this work with single-family as well? 

Hey @Jeff S. ! Thanks for that insight! I didn't know a lot of the information you lined up. I was wondering if there is a threshold on the amount lent that puts a person into the bucket of having to deal with federal regulations? Does the relation between the hard money lender and the lendee make a difference (kind of like the different types of syndication)? There must be some guidelines that differentiates between a family/friend hard money loan and an institutionalized hard money lender.

@Justin Tyler Your best bet if you're willing to occupy the property is a fha 203k loan. The loan is an FHA product that requires 3.5% down payment. You can buy a 1 - 4 unit property. The 203K loan allows you to finance the purchase of the property and the rehab budget up to 110% of the ARV. You'd want to refinance into a conventional loan after 6 months to drop the mortgage insurance, assuming you have more than 20% equity in the property as a result of the rehab. You'll need a 580 credit score or better to put 3.5% down. All other fha guidelines apply.

Only drawback is speed. It takes about 45-60 days to close a 203k loan and you need a lender that is approved in your state to do these loans and has experience with them. You'll also want your lender to be servicing this loan themselves through the reno project to prevent delays with the draw requests. The HUD website has a list of all the lenders who have closed on these loans and how many YTD. Google "fha 203k hud endorsements" to find it. Cross reference with a list of 203k approved lenders by Googling "hud lender list search" and choosing "Single Family and Multifamily Servicer-Originator" and "203(k) Rehabilitation Mortgage Insurance Program" as your search criteria. Also, your GC needs to be familiar with these kinds of loans and financially stable enough to wait a few weeks to get paid along with the draw schedule.

Not a super simple loan product but very good way to get your first investment property to house hack. I'm currently looking for a quadplex to do the same thing with.

@Justin Tyler It could be a challenge but I'm targeting sellers such as HUD, Fanie Mae, absentee owners, etc. Retail sellers on the MLS are not going to wait 60 days to close, in most cases. However, someone who owns an inhabitable property or a tired landlord might. HUD and Fannie Mae will prioritize consumers over investor buyers. I pulled a list of quads in the counties that I want to buy in, and am hoping to overlay that list with a list of evictions, code violations, in rem, and vacant properties to find sellers off market.

Also, I'm researching how to use the 203k to build quads using the existing foundation. As long as the existing foundation is in play, you could build an all new structure on top of it. I might be able to build vertically on a duplex structure to get a quad if the permitting allows it. Trying to think out of the box to find the right properties.

Hard money lenders do not make loans to homeowners because of the greatly increase regulation of those types of loans. HML only make  commercial loans. 

Originally posted by @Justin Tyler :

What's to keep me from not disclosing the fact that I plan to live at the property and rent out rooms (if single family)/units (if small multifamily) once the rehab and refi are complete. I am just an honest guy and would prefer to go about this in an ethical way. 

Obtaining a loan under false pretenses is fraud. Using the funding from a loan for purposes other than stated in the loan documents is fraud. Fraud is a felony. Could you get away with it? Maybe, especially if you promptly pay the loan off in full. However, your lender might choose to call the loan due or begin the foreclosure process if they discover the fraud. Do you have the resources to quickly pay off the loan if the fraud is discovered? Are you generally lucky? Is the risk worth it to you? Is this the way you wish to conduct your business?


@Jeff Rabinowitz great points. To answer your last question, no that is not the way I would like to conduct my business and also the reasoning for me stating that I would prefer to go about it in an ethical way. I was simply trying to understand the reasoning behind the laws that are in place. I have since decided to use a different strategy for my primary residence and use the BRRRR strategy for properties that I will not owner occupy.