Why use hard money in the Brrrr strategy vs starting with a loan?

Question

I know this is a basic question but my wife asked me and I did not have a solid answer other than I know it is the process in everything I have seen.  And by hard money I also include other cash methods such as personal cash/HELOC to buy the home then get another loan on it later VS just taking that loan out up front?  Just to get you cash back from fixing it up right?

Sean Blomquist · Answer

@Jeremy Karja the reason to use a HML to acquire vs going the traditional route is simple.  Less money into the deal.

If you buy a rental property with a traditional loan, you are looking at having to bring at least 25% down on the purchase.  Then if the property needs any repairs to get it rental ready, it would be out of your pocket.  Granted, it has to be limited repairs, or a traditional lender may not loan on it to begin with.

In the Hard Money scenario, you would acquire the property and rehab it using the HML.  Depending on the lender, you may be able to do that for no money down.  Once the rehab is done, you would refinance out with a direct to Fannie Mae lender (no seasoning required).  Because you increased the value to the property (built equity into it), they can do a rate and term refinance.  That most likely will mean little to no money down on the refi.

Since you have put much less of your own money into the deal, you can do more deals quicker than saving up a down payment for each property.

Mind you, this only works with HML if the property needs rehab to increase the value.  It won't work a turn key rental or a very limited rehab (paint and carpet).

Let me know if you have any other questions.

Jason Hirko · Answer

1. Time to close

2. Rehab funds as part of the loans

3. Property condition not considered

4. Easier borrower qualifications

John Woodrich · Answer

@Ryan Bakerian take the 100k LOC with $0 collateral, that deal sounds too good to be true.

@Sean Blomquist at Pine Financial can get you setup with a HML, you will have to see if they invest in your area.

Max T. · Answer

You can use a conventional loan!

But the other options allow you to make more aggressive offers: lower prices, faster closings, etc...

Stanley Parsley · Answer

if the deal makes sense then always use opm

this way when you flip or refi you still have that padding to help you out-your money

enjoy

Brent Coombs · Answer

My comment is: so what? Each Buy should not need to be about a specific amount of monthly cash flow after Refinance, (so long as it does remain positive).

Why NOT focus on higher cash flow? 1. You've got NONE of your own money left in each deal!

2. Because you bought right, you still have 25%+ equity in each deal (that cost NOTHING)!

3. Because from the moment each Buy is Rented and Refinanced, your tenants are paying it off!

4. Because after every Refinance, you have your deposit back for your NEXT Buy!

5. And with each Buy/Refi, your TOTAL cash flow DOES increase! Ready, set, GO!...

Sean Blomquist · Answer

@Jeremy Karja we still have clients able to do it and cash flow at least 300 per door.  The window is getting tighter, but you are still able to do it with the right properties.

Jeremy Karja · Answer

Thanks everyone!  Great points @Brent Coombs.  If someone else is paying the dollar amount does not matter as much at all long term.  But I also want some short term income as well and I don't want my Cap Ex expenses to eat up all the profit each year.  I work in retirement for my day job so I get the power of real estate is FANTASTIC for the longer term as well.

Ryan Bakerian · Answer

Does anyone have any reccomendations for HML for flip properties? Local banks obviously are out I'd think. I do have a guy willing to give me 100K line with no collateral.

What type of interest do these HML's charge? Fees?

Rolanda Eldridge · Answer

@Jason Hirko..., Yes!!! Time is a Big factor.  My first Retail Flip, flopped because of Time.  Funding in place, but deal needed to close by a certain date.  I would  lose $1000 EM, but funding maybe about 4 days too late.  Assurance and ease of closing increases confidence to pursue deals..10 days or less, ideal...

Why use hard money in the Brrrr strategy vs starting with a loan?

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