when to use a hard money lender and best exit strategy

Question

Okay so we have 2 rental properties and our primary residence I want to purchase more buy and hold duplexes or fourplexes for cash flow.With not having enough capital for a down payment I was considering this option, purchasing a property at 70% to MV with a hard money lender and then waiting the 12 months or more for (seasoning) and then refi with a bank. Has anyone used this strategy before.

Account Closed · Answer

Hard money rates can be as much as 18% per year not including any other loan fees. Question is... are you able to service the loan at that rate until you are able to refinance? Or is the rent able to service the loan at that rate for whatever the duration for seasoning is?

Cheryl P. · Answer

@Jason  crouch  you also need to confirm but many HML want a down payment also so the borrower has some skin in the game.  Have you tried looking for a local bank that does portfolio lending or HELOC on investment property.

I am debating the pro's and con's of using HML for fix/flips with conventional re-fi as back-up if property is not completed or sell within 120-180 days.  HML is expensive but I like that I can get purchase and rehab costs.

Also looking for lenders that will allow me to pay PMI upfront at closing in lieu of down payment and monthly PMI payments.  This would free up my cash while still using a conventional loan with low interest rate.  But I'd likely have to fund the rehab.

Jackelyn Gonzalez · Answer

18% is crazy! I work for a private money lender and rates range from 8.50-11.00% 2 - 2.5 points. Lots of people use this strategy whether it's because they are short on cash at the moment, need to raise credit score, need to season property or simply need fast cash that a hard money lender can provide to meet a deadline etc.Term for it is a bridge loan.

John Thedford · Answer

I do HML at 12% plus 4 points. I typically write for 24 months. I would not take a HML unless I was 100% sure I could refi out within a year. If you are buying under market, can cover all expenses, and refi out after a year that would be worth considering. If not, think of other options.

Chad Clanton · Answer

The major catches with hard money are a) higher origination fees - 3+ points, b) higher interest rates - 12%+, typically, and c) short terms - i.e. the terms are typically going to top out at a year before the balance becomes due, though some go longer. That said, you'll need to be able to refi quickly, and to be almost certain that you'll be able to on that property. Hopefully this helps some.