Can you refinance out of a hard money loan?

19 Replies

My business partner and I have found a great deal for a buy and hold but it definitely needs repairs. We would like to use a hard money lender to finance the purchase price and repair cost. I spoke to one this morning and they can cover all of the purchase price and 90% of the repair cost, so we will need to bring $10,000 to the table at closing, which we are fine with doing.

My question is, can we refinance this property into a 30 year conventional loan and use it as a rental instead of selling the property? This would produce us $303/month in cash flow and have a 14.6% cash on cash ROI. If we did this, will a hard money lender allow for us to keep the property instead of selling it?

@Melissa Harris You will want to ask the Hard money lender what their terms are. Most are short term loans for "bridge financing", but some may have other long term products. It sounds like you have a great property. Don't be worried if you find "secondary" property rates of 6-7% on 30 year products. The cost is so little compared to the conventional loans and often you have fewer hoops to jump through. Good luck with your investment! 

@Melissa Harris

You mean 90% of the purchase and 100% of the rehab, right?  I've seen many lenders offer this, but none the other way around because that's essentially 100% financing and no lender likes to do that.

Be careful about thinking that all the money you need is just 10% of the purchase price.  There are also things like closing costs, points paid upfront, prepaid insurance, prepaid interest etc.  Lenders also like to see 3-6 months of monthly interest reserves as well as enough money in the bank to start the rehab work (because the rehab is reimbursed in draws, not given up front).  I don't want you to get the property under contract and then get near the end and have the lender tell you that you don't have enough reserves in the bank.

If you plan on refinancing into conventional, you'll have to switch the title to your name (because I assume the HML will want you to take title in an LLC), and there are seasoning requirements. I suggest you plan this up front with a conventional lender before purchasing the property and make sure you're able to check off all the boxes to do this correctly.

As @Jack Bobeck mentioned, you also have the option of refinancing with a non-conventional lender. It'll be a little more expensive, but much easier to qualify for than the rigid rules of a bank, and you'll be allowed to have the loan in your LLC. Usually, they have less seasoning requirements as well. I've seen a few with no seasoning at all.

@jackbobeck thanks for the advice! I called the hand money lender and spoke to him about this and he definitely helped me on how this works :) 

@Nghi Le yes that is what I meant! Lol. Thank you very much for the heads up on all the other costs that I need to take into considerations, I only thought of a few of those, so I appreciate it! 

I will definitely look into talking to a non-conventional lender about refinancing end of things and how that really works with using hard money. 

@Nghi Le So many options for funds without having to be tied to personal guarantees. I can get non-recourse loans, pay 6-7% on the notes, and be able to refi for 30 years. Its awesome! I don't care if the % is higher than conventional, the PITA factor is much less with non-recourse than the conventional side. 

We all know you have to have money....to make money. Its so true in the world of real estate. 

@Jack Bobeck when you say the PITA factor and costs are lower with nonconventional lenders, does that mean closing costs are often lower?

Talking to one of these lenders, but haven’t talked numbers on closing costs.

@Dillon Leider I always factor in at least 3% of the loan amount for closing costs. Lenders tell you what you want to hear when chatting with them, then once you get the HUD, they forget to tell you about all the "fees". So I use 3% as my factor. I learned that from my wife who is a Realtor. Hope it helps.

Originally posted by @Jack Bobeck :

@Dillon Leider I always factor in at least 3% of the loan amount for closing costs. Lenders tell you what you want to hear when chatting with them, then once you get the HUD, they forget to tell you about all the "fees". So I use 3% as my factor. I learned that from my wife who is a Realtor. Hope it helps.

"Don't be worried if you find "secondary" property rates of 6-7% on 30 year products. The cost is so little compared to the conventional loans and often you have fewer hoops to jump through. Good luck with your investment!"

But Jack, you were saying that the costs of non-conventional underwriting is much less and that you have fewer hoops to jump through. What did you mean by that? My understanding is that these types of loans usually cost MORE than conventional/conforming.

@David Weintraub so we could take title under our personal names if we chose too? My partner and I will more and likely start an LLC, just to make things a little easier on our end.

@Dillon Leider  But Jack, you were saying that the costs of non-conventional underwriting is much less and that you have fewer hoops to jump through. What did you mean by that? My understanding is that these types of loans usually cost MORE than conventional/conforming.

Much less PAIN, It took me 6 months to do a conventional with my history and my wife being a self-employed Realtor, it was one thing after another. Sure a non-recourse has a higher int rate, but its not 6 months.....usually. 

I'm done with conventional/conforming Freddie/Fannie products. I don't care if I save 2-3 points on the loan, its not worth the PITA! Hope that helps. 

Originally posted by @Melissa Harris :

@David Weintraub so we could take title under our personal names if we chose too? My partner and I will more and likely start an LLC, just to make things a little easier on our end.

 correct. 

Lenders don't want you to take loans in your personal names for a variety of reasons.

There are the legal aspects from their end, of having done a "commercial loan" to an individual.  You could find yourself in some hot water.

If there's a foreclosure, etc, they really aren't looking to see a borrower get crushed.

They will do it in situations where the seller requires a purchase by an individual. Lets say it's a 55+ community with strict rules, or a condo association that won't allow sale to LLC. In that case they can make exceptions. Not all of them, but some.

End of day, they will likely require the LLC unless there's a reason it can't be done.

This post has been removed.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.