San Francisco, CA · Member since 2017 · 18 posts · 5 votes
Going to be funding my first BRRRR next ($70k-120k purchase + rehab). I have the option of using hard money or HELOC from my primary residence. I'm debating on which option is better. I plan to refinance within 6 months to lower rate / longer term.
All else being equal, which do you prefer? Has anyone used both and found one option more favorable?
HML higher rate (7-9%) but fixed. HELOC usually lower rate but variable and also your house is used as collateral. May have hidden costs with appraisals, title, etc.
@Eddie L. that's great you're getting started. Using Hard Money for your first BRRRR, if you don't have experience, you will be looking in the 9%+ range. With the hard money loan, you may be able to finance 100% of the REHAB on the property.
Possibly consider trying the hard money loan, with the HELOC for the down payment only. You will probably be looking at 25% down if you have zero experience with the BRRRR model.
As you get more of these under your belt, your terms, rates and points will definitely improve.
@Eddie L. that's great you're getting started. Using Hard Money for your first BRRRR, if you don't have experience, you will be looking in the 9%+ range. With the hard money loan, you may be able to finance 100% of the REHAB on the property.
Possibly consider trying the hard money loan, with the HELOC for the down payment only. You will probably be looking at 25% down if you have zero experience with the BRRRR model.
As you get more of these under your belt, your terms, rates and points will definitely improve.
@Eddie L. Depending on who you get your HELOC with, you may or may not have added costs. I applied through PenFed and we just did a desktop appraisal which is enough for what I need. Zero costs so far. I haven't used hard money yet but I am cautious as (1) not sure how solid the lenders are and (2) higher %.
It's always much cheaper to finance projects yourself. Hard Money is typically more of a "last resort" when all traditional financing means have been exhausted. With a LOC you can also recycle those funds for multiple projects. My wife and I have a very specialized 1st position LOC that allows us to sit all idle funds on our balance and gives us 24/7 access to equity. Our goal is to use the 30 year term to build additional wealth with our previously "trapped" equity.
@Eddie L. If you are only going to use the money for about 6 months the actual cost in dollars of the HM is t that significantly higher than the HELOC.
A couple other considerations: 1) it may be a good idea to use the hard money for the majority of purchase price and rehab then you always have your HELOC as an emergency fund if something goes wrong. It is hard to go to an HML in the middle of a project that is going wrong, but your HELOC is yours to decide what to do with.
2) taking out all of the money from your HELOC can have a temporary negative effect on your credit score depending on your situation. If your line is $100k and you take out $100k your utilization rate (one of the key factors in credit score) goes way up. If you have lots of other credit lines then this isn't a massive impact, but depending on where your score is now it could be enough to raise the rate on the refi. Use a credit estimator to see how it may effect your score.