Hard money

21 Replies

Would you use hard money for a buy and hold property?

Sure.  My business partner and I have bought 4 multi family's in the last year, bought them using hard money, rehabbed them, and refinanced them after the repairs were done.

Are you talking about using a HML to acquire a property that needs work?

Michael Noto, Real Estate Agent in CT (#RES.0799665)
860-384-7570

Not to buy and hold. To buy and rehab...thentake it out with refi yes. You can't use HML to hold a property. Theloan itselfis usually very shortterm, and the interest rate is too high.

Most hard money is short-term. You might be able to find private money that will give you a long-term loan.  If you can find it, that could be a good option for a buy and hold property.

Hard money is way too expensive to use for buy and hold. A HML is normally used for up to a year to fund a deal for either flipping or refinancing. You should never borrow money for anything until you have your exit carefully planned.

My whole model is based off using hard money for buy and hold.

Here is how I view the benefits.

1) REGULAR PURCHASE WITH YOUR OWN MONEY
A typical deal would be to put down 25 to 30% as a down payment, pay the rehab out of pocket and either be done or try to do a cash out refi to get your money back.

So lets say, you're buying a house for 80k that needs 20k rehab. 25% is 20k, rehab is 20k. You are now out of pocket 40k.  How much does that leave your bank account to show for reserves? If you started with 50k, then you are now down to 10k. How do you qualify for a refi with 10k in the bank? Gets pretty trick.

Secondly, in order to get any of your 40k back out, you need to do a cash out refi. Well, not many banks do cash out refi's once you get over 4 properties. And the few that do tend to have seasoning of 6 mos to a year. 

So what you're looking at is, in a best case scenario, tying up that 40k for 6 mos to a year. And possibly having to struggle to qualify since you would only have 10k in the bank.

2) PURCHASE WITH HARD MONEY

Now, here's where you turn it around and use hard money on the same deal. 

The key is that you can only do this with good deals - i.e. all-in price (purchase plus rehab) needs to be 70% of the ARV or better. So in the example above, lets just say that house that is going to be all in at 100k is actually going to be worth a 145k when you're done.

Here is the value you get from using a hard money lender to do this deal.

Hard money lender allows you get a loan of the full 100k (80k purchase plus 20k rehab). You pay 4 to 5 points on the loan plus closing costs (5 to 6k) out of pocket. Once the rehab is complete, you then go to a bank to do a rate/term refi. Much easier to get. Seasoning requirements much more relaxed as well. 

And, oh by the way, you had 50k in the bank and only spent 5 to 6k on the hard money fees and closing costs so you now have 45k in the bank.  Much easier to qualify for loans when you have 45k in the bank as opposed to 10k as you would under a normal scenario above.

So those would be the reasons I believe hard money is the BEST option for financing buy and hold properties. That being said, I think a big reason for that is if you have limited reserves like I've always had.  For those people that have 100k or more in the bank or maybe for those that are only looking to buy one house a year or every 2 years, then I'd suggest hard money would not make as much sense.  You'd simply be adding costs to the deal for no real problem that needs solving.

But since many of us are looking to grow a little faster than that and likely don't have that much money in the bank, I'm a firm believer that using hard money is the best way to go for many buy and hold investors.

Very well put @Mike H. . I did just that with the one I doing a refi on now. $2,000 cash to buy, HML @ 11.99% with 7 year balloon, doing the refi and pulling out $26,000 cash.

I have spent about $7,000 in 3 years on repairs but also had it rented out for two years at $600/m, also deducted repair costs, property taxes, and depreciation from income taxes.

That is beautiful deal right there.  With the refi, you're getting paid to take the house and you're still making monthly cash flow on it too.

I've rarely done cash out refi's on my deals, but I'm closing on 2 of them sometime this week or early next.  Its an amazing thing. Basically, I'm getting paid to take the house plus I'm getting monthly income from them AND I still have quite a bit of equity left in there too.

Doesn't get any better than that.

Wouldn't want to do that on every deal though as I like being at LTV's around 65% to 70%. But if I can do a couple of them to reset my finances and they still have reasonable cash flow, then why not.

@Mike H.  So what is the end result of example number 2? 

-How much money will you get the rate/refi for? Would you get cash out?

-Why does the bank become more cooperative this way, is it because you actually own the house? (or does the HML)

-How much did you end up paying the HML?

-How long (ballpark) would this take place over?

-What type of credit score are we talking to get this done (range)?

I realize your scenario is an example, but it is a very good one. I follow all your numbers and see your point, but as a "newbie" I just want to see the math all the way through. I learn best by these type of examples.

I appreciate your example and input!

@Mike H.   Beats the heck out of selling. Why pay Capital gains tax when you can have your cash and beat it too, (weird sense of humor.) The home actually appraised at $100K so I am at ~72%, not bad! The best thing is that you will have the cash to finance a deal that you might have missed out on otherwise.

I would just like to thank everyone for their response.  It seems that if I want to  rehab and then refi the property then it is a good idea.  I think I am looking at using hard money to help with 30% down payments on buy and hold properties.

@Charles Morgan   Its good to see I'm not the only one with the same mindset on these deals. Again, I don't pull out cash on all my deals. But if I can do it on one or two, then why not. 

@Jonathan Key

So what is the end result of example number 2?

-How much money will you get the rate/refi for? Would you get cash out?
Answer: So in the example, the hard money loan was for 100k (80k purchase and 20k rehab). I would refi that rate and term for 100k plus the closing costs so I wouldn't have to come out of pocket anything. And most banks allows you to pocket 1k or 2k even and still be considered a rate/term refi.  So my end loan would be 102k to 103k maybe.

-Why does the bank become more cooperative this way, is it because you actually own the house? (or does the HML).
Answer: This is based on my discussions with banks. But in the ones I've talked with they explain it as layers of risk. So to them, there is a risk level associated with financing a house that needs rehab. There's a risk level associated with financing a house with no tenant, etc.  There is a risk level with financing a house with no money down. And there is a risk level with investment properties.

The reason why they will do a rate/term refi so much easier than say providing the same amount of money as a no money down rehab loan like the hard money lender will do is that the house is rented. The house is rehabbed. And they're doing a rate/term refi.  Someone else, in their mind, has already taken the risk that you will fix it up and get it rented and that it will appraise for $150,000 when its done.

As far as the bank is concerned, if you're doing a rate/term refi and not pocketing any cash, there's less likely a chance that you're running some scam with an appraiser to take off with a bunch of money.  You're getting no money. And if the appraisal comes in at 150k, the bank figures they're going to be able to sell the house fast for 103k or whatever and get their money back. Or maybe even 80k so their losses are limited. 

But if they lend on the house pre-rehab, then there is a risk you don't do any of the repairs like you said you would. And they're stuck with the 80k loan on a house thats really only worth 80k (since thats what you paid for it before any rehab).

But its just industry standard in banking terms that a cash out refi is a more risky loan than a rate/term refi. And its much more difficult to find banks willing to do cash out refi's on investment properties than rate/term refi's.

-How much did you end up paying the HML?
Answer: In the example above at a total loan of 100k, I'd be paying my hard money lender 4 points plus I'd be paying the closing costs and some additional fees. Maybe 6k total. But I will also be getting the property tax credit that I can use to offset some of that as well. So maybe 3k actual out of pocket at the closing.

-How long (ballpark) would this take place over?
Answer: My typical turnaround time for purchase to refi into the end loan is about 3 to 4 months. I just had a house in bradley that I turned around in about 2 months. But thats because I told the portfolio lender about the house before I even closed and they were ready to go as soon as I said the rehab was completed. And the rehab was done in 3 weeks - which is pretty rare for me. Usually, I figure about 6 weeks for most rehabs. And another 6 to 8 weeks for the refi.

-What type of credit score are we talking to get this done (range)?
I think you should have 700's if you're doing portfolio or conventional 1-4. If 5-10 conventional, then you are required to have 720.  As an investor, we're typically getting dinged pretty good for credit pulls though. So it can be tough. But I have zero negatives on my credit. Good w-2 income.  And solid reserves.  For the local banks, the entire picture of those items really makes a difference. 

Also, at some point, your payment history and ability to grow really help make your case as well. When I was first starting, I would get a million and one reasons why they would question doing a loan with me. And all the risks of investment properties, etc, etc. Part of that was the climate we were in (i.e. during the bust) but part of it was lack of experience and lack of a historical model.

5 or 6 years later these same banks have seen me grow from 4 or 5 houses to 32. They can see the deals I'm doing (they know the areas) and they see the model is working and my payments are coming in like clockwork (because I set them to auto pay).   So that plays a part in there too.

With conventional 1-4 property financing, its all about dti ratio, credit score, and somewhat the reserves. 5-10 is the same and the reserves jump.  After that, the portfolio lenders are more common sense lenders that they seem to care more about the entire picture than any one thing.  

I think I've recently posted a couple of details on my last few deals just to give you a sense of the actual numbers. Check out some of my last few posts and you should be able to get a real good idea of why using hard money is such a great way to grow a portfolio for those of us with modest capital to start with (I do stress modest vs none at all). 

I can tell you I would never been able to get more than 3 or 4 houses in this time if it weren't for hard money lenders.

And, btw, just in case you're wondering, I have absolute 0 connection with hard money lending, specific lenders, or anything or anyone else. I literally have 0 incentive to push people toward HML's other than the fact that when I was trying to figure out a way to actually do this crazy thing we call investing, this was absolutely the only way I could come up with to get to where I wanted to be...... Hard money simply works incredibly well for buy and hold investing that want to do what I've done.


@Jonathan Key   I can use my current refi as an example.

Purchase $2,000 cash, HML $47,000 at 11.99. In May will be 36 months (refi should be done before that). I have been paying $725/m. w/escrow, current payoff $42,600. Original purchase price by the way was $40,000 so I owe more now than when I bought it.

These are approximations as I would have to look up exact numbers. I have a little more info in the previous post. If I never rented it I would have made $26,100 in payments w/escrow, plus $7,000 in repairs. As I am pulling out $26,000 it would look like I gave up $9100 to do this but I had several benefits in that 3 years: 

1. I lived there.  

2. I deducted repairs, Property tax, Insurance, Mortgage interest, depreciation and who knows what else from my Income Tax ( my accountant could tell you the what elses). 

3. I did bring in about $14,400 in rental. 

4. The property appreciated $60,000 because of the repairs.

I hope this helps some. Any thing you buy will of course have different numbers and I did not have time to shop for an HML so I am paying the price so to speak.

(*topic transferred to MSWord; saved; printed; inserted into my personal big book of RE knowledge)

@Mike H.  As they say down here in Texas, D*mn it Sir! To be honest I was struggling a bit with the concept (logistically) of Buy and Hold - that is until now. What a great example, great logic backed by the math and point proven by tremendous experience. To the kids watching at home...that's how it is done.

Another example of a great BPer providing valuable insight to the newly formed masses!

I thank you Sir, I really do appreciate it.

@Charles Morgan  Thanks for putting it to your example fellow Texan!

@Mike H. Love the input - thanks much for being so open. Wondering how the bank looks at your portfolio when you're applying for the rate/term refi. Do they ever push back because of being over-leveraged? I'm assuming this hurdle is jumped by the fact that you have already acquired the home with the HML and are now just refinancing. Guess I'm just looking for an affirmation (or not) on that assumption.

When I first started, I was getting a littany of reasons why the local banks didn't want to do the refi's (as portfolio loans).  And that was one of them - that I was doing it with so little money out of pocket (i.e. NONE).

But I think there were really two underlying reasons why it was so hard for me to get loans back then.

1) The market for SFHs was absolutely horrendous. Very few banks wanted to touch SFH loans back during the bust (i.e. 2008, 2009, etc). And fewer still wanted to or were able to touch SFH investment property loans. They were as toxic a loan to a bank as anything on the planet back then.

2) I had little experience. When you go in to a bank and you have 4 or 5 houses and a year or two under your belt, they don't tend to view you with rose colored glassed. I can't tell you how many bankers I met with that said investment property loans were too risky. That if I lost my job, they'd be the first one I'd stop paying.

And my response was always the same. Listen, if I lost my job - and the economy was such that losing a job was very real - , you are going to be the only payment I make. Because those rental properties will be the only income I have coming in.  And to this day, I still believe that if I were to ever lose my job, I would end up losing my house (primary residence) before I would stop making payments on my rentals.

My primary residence doesn't make me money. And without a job, money is the one thing I'm going to need most. 


And that goes a long way too. Layers of risk. Lack of experience - gone. Lack of relationship/payment history - met. Housing market improved - check.  

So, no, I would actually say that its much easier for me to get these loans today from local banks than it ever was. I actually have the banks checking in with me to see if I have any new loans for them.

Now at some point, I'll start to reach a limit with some of these banks.  A couple of them are very small and they can only go up to a certain amount of lending for one customer.  But that is one of the good things of doing loans with multiple banks. 

I've got loans with 8 different local lenders. And that is definitely something I would recommend. As soon as you go over that 7 or 8 mark and start working the local portfolio lenders in your area, try to do loans with as many of them as you can. Start building your payment history with. So that in 6 mos to a year, you can come back to them and ask for another.

I had been hoping to do the same. Evidently though, there has been a change in lending guidelines that prevent someone from doing a hard money loan through an LLC (most hml's I have talked to require the loan to go to a real estate LLC) and refinancing without six months seasoning.

And the hard money lenders I spoke to don't allow occupancy. Some may - you should ask about this.

I did hear that some hard money lenders will lend over $100k to you personally - not an LLC - and then you can refinance before six months.

I just closed deals with two hard money lenders - dohardmoney and red dirt lending.  I can't say enough good things about red dirt lending - they are fantastic. I can tell you more if you want to message me privately about either lender.

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Question for this group. I've been considering the hard money/cash out refi scenario however have recently become aware of Fannie Mae's restrictions on individuals with 5 or more Fannie Mae financed properties. Today's guidelines prohibit a cash out refi with individuals with 5 or more Fannie Mae loans unless done in the first 6 months after purchasing the property. This seems risky if for some reason the rehab goes longer than 6 months. What's the exit strategy in this scenario? Any advice would be greatly appreciated.

So, HML always charge interest only, correct?

Mike, you are using a HML for buy and hold, but you are still refinancing with a bank, so the HML loan is only temporary, until you refi., correct.

Can you explain the difference between a cash out refi and a rate/term refi.  Thanks.  Great post.

@James Bitakis rate/term refi's only change the rate and term of the loan, but at the same loan amount (assuming you don't roll closing cost into the refi like in Mike H's example).  This differs from a cash out refi since, as the name suggests, you are cashing out new money along with a new loan rate and term.  Going the rate/term route generally results in a lower interest rate than a cash out refi.

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