Rental Property Investor · Elk River, MN · Member since 2016 · 102 posts · 10 votes
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?
@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).
That all makes sense. My question for you guys after speaking to some seasoned guys in MN they said it is nearly impossible to do that BRRRR strategy in MN and cash flow 300 a door right now with how competitive it is. Do you believe these to be the case? These were active investors with a good amount of properties.
@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.
@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...
That all makes sense. My question for you guys after speaking to some seasoned guys in MN they said it is nearly impossible to do that BRRRR strategy in MN and cash flow 300 a door right now with how competitive it is. Do you believe these to be the case? These were active investors with a good amount of properties.
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!...
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?
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.