Buy with my own cash or use hard money

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Buy with my own cash or use hard money

Nick M.
Investor · Wilmington, NC · Member since 2017 · 29 posts · 10 votes

I made an offer on an REO property in southern NJ. Details below:

Offer price: 70k

Rehab budget: 35k

ARV: using comps in the area 165k. Going conservative and will say 150k

Goal: Probably fix and flip. May BRRRR.

I have the cash to purchase the property outright. I have enough equity in the other properties I own to take a HELOC to cover the rehab. However, I'm considering using hard money lender for the purchase price of the home. I don't want to use them for the rehab as I will be doing some of the work myself and I'm not a licensed contractor so getting reimbursed with draws wouldn't work.

I understand that I will make less money due to the various fees that come with hard money lending. My thought process is twofold: 1) I'm not sure I'm comfortable using 2/3 of my "safety net" (savings in case I lose my job, someone in my family is in hospital, etc.) to fund the purchase. 2) My goal is eventually to purchase real estate in a better area where tenants are more stable. I won't have enough cash for those BRRRRs. So by using hard money now, I prove my ability to get a flip done and start getting better rates, fewer up front points, etc. for those larger transactions later.

Curious to get other's feedback on any and all of the above. Thanks in advance!

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Aaron Pfeffer
Lender · Los Angeles, CA · Member since 2015 · 127 posts · 82 votes
8y

It never ceases to amaze how many investors disparage the use of HMLs. There's this never ending stigma that all are predatory scumbags who can't wait to steal your property after you slip up. Uh, no. Nor should you ever use ALL of your own cash if you don't have to. Especially for a flip. I promise you there are a number of HMLs who will fund you 70-80% of your purchase price on a one year note with no prepayment penalty for a reasonable interest rate and fees, and you can have them include 100% of the rehab money or not depending on how you operate with your flips. That part is up to you...but leverage is everything. And you know what else? You can just as easily get a non-recourse hard money loan for maybe another 1-2 percentage points on the rate if you're really concerned about a personal guaranty of the note. When it comes to flippers, there are a number, a ton, a plethora! of national and local HMLs in every state in this beautiful country of ours who want to fund your project with the intent of seeing you succeed, making you a repeat customer, and doing it again for your on your next project. These loans are business purpose bridge loans on non-owner occupied property and everyone involved in the loan process (lender and borrower and escrow/attorney and title company) should be speaking the same language. The language of profit. The borrower makes a profit, and so does the lender. Rinse, repeat. So yes, use an HML @Nick M. What really stands out about your post is that you are from North Carolina and purchasing a flip in New Jersey, and I hope you are comfortable and qualified to do an out of state flip, because that can be daunting. And honestly, the numbers you are throwing out are meh. You're saying the rehab cost is half the cost to buy the house. That's a bad ratio right there already. Then purchase costs, holding costs, and sales costs to make $10-20K in taxable profit, and that's if your rehab doesn't balloon to $50,000 like they often do. If you have the cash to do this yourself, you'd be better off lending out your $100K as a private lender yourself at a max of 60% LTV for 10% interest. That's $10K annualized right there and you'd sleep at night and have all that other free time on your ends not doing a flip in South Jersey. But that's just one person's opinion...

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    If you can I would use your own cash unless you are not confident in the flip, otherwise you will be paying points and the high interest of a hard money lender.  Ideally the goal for everyone should be to use their own cash for flips, HMLs are for those that don't have it.  

    Your risk will be essentially the same just in different forms of assets.  If the flip goes bad with your own cash you have the property that you could hopefully sell to get back some of your money.  If the flip goes bad with the hard money lender you not only have to recoup the cost of the property but their fees and interest as well, and you would still lose the property and probably have to pay them some cash out of pocket or tank your creditworthiness.

    Hope that helps

    2Reply
  • Maxwell Allen
    Palos Verdes Peninsula, CA · Member since 2017 · 20 posts · 5 votes
    8y

    @Aaron K. I would actually argue the opposite. If you are confident in the flip, wouldn't you want to leverage it to increase your IRR? Cash is less stressful in the sense that you don't have to worry about making interest payments but leveraging a good flip will increase your return and free up capital for other investment opportunities.

    2Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    @Maxwell Allen I think that the poster is likely doing just one flip at a time (correct me if I'm wrong) and in that case the cash would just be sitting in the bank earning 1% interest. Also the short term and high interest of the hard money loan, means that the opportunity cost of the cash to get a return greater than the interest and fees of the HML is fairly low unless used as a down payment on another equally good flip.

    2Reply
  • Nick M.
    OP
    Investor · Wilmington, NC · Member since 2017 · 29 posts · 10 votes
    8y
    Originally posted by @Aaron K.:

    @Maxwell Allen I think that the poster is likely doing just one flip at a time (correct me if I'm wrong) and in that case the cash would just be sitting in the bank earning 1% interest. Also the short term and high interest of the hard money loan, means that the opportunity cost of the cash to get a return greater than the interest and fees of the HML is fairly low unless used as a down payment on another equally good flip.

     Correct. I am only looking at one flip currently. it’s my first one and I didn’t think having multiple going was a good idea. Maybe that’s not the right attitude. But I’d rather be cautious and learn from my mistakes on one than be making mistakes on multiple properties (and potentially making problems exponential) 

    0Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    Being cautious especially with your first property is always a good idea, it will limit your losses if there is something you overlooked.

    1Reply
  • Aaron Pfeffer
    Lender · Los Angeles, CA · Member since 2015 · 127 posts · 82 votes
    8y

    It never ceases to amaze how many investors disparage the use of HMLs. There's this never ending stigma that all are predatory scumbags who can't wait to steal your property after you slip up. Uh, no. Nor should you ever use ALL of your own cash if you don't have to. Especially for a flip. I promise you there are a number of HMLs who will fund you 70-80% of your purchase price on a one year note with no prepayment penalty for a reasonable interest rate and fees, and you can have them include 100% of the rehab money or not depending on how you operate with your flips. That part is up to you...but leverage is everything. And you know what else? You can just as easily get a non-recourse hard money loan for maybe another 1-2 percentage points on the rate if you're really concerned about a personal guaranty of the note. When it comes to flippers, there are a number, a ton, a plethora! of national and local HMLs in every state in this beautiful country of ours who want to fund your project with the intent of seeing you succeed, making you a repeat customer, and doing it again for your on your next project. These loans are business purpose bridge loans on non-owner occupied property and everyone involved in the loan process (lender and borrower and escrow/attorney and title company) should be speaking the same language. The language of profit. The borrower makes a profit, and so does the lender. Rinse, repeat. So yes, use an HML @Nick M. What really stands out about your post is that you are from North Carolina and purchasing a flip in New Jersey, and I hope you are comfortable and qualified to do an out of state flip, because that can be daunting. And honestly, the numbers you are throwing out are meh. You're saying the rehab cost is half the cost to buy the house. That's a bad ratio right there already. Then purchase costs, holding costs, and sales costs to make $10-20K in taxable profit, and that's if your rehab doesn't balloon to $50,000 like they often do. If you have the cash to do this yourself, you'd be better off lending out your $100K as a private lender yourself at a max of 60% LTV for 10% interest. That's $10K annualized right there and you'd sleep at night and have all that other free time on your ends not doing a flip in South Jersey. But that's just one person's opinion...

    9Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    I'm not saying hard money lenders are bad, just that they are not the right answer for every situation.  Having your own money sit in the bank while paying interest to someone else to use theirs is not usually a good option unless that money is your only emergency fund, saving for a specific goal etc.

    1Reply
  • Nick M.
    OP
    Investor · Wilmington, NC · Member since 2017 · 29 posts · 10 votes
    8y
    Originally posted by @Aaron Pfeffer:

    It never ceases to amaze how many investors disparage the use of HMLs. There's this never ending stigma that all are predatory scumbags who can't wait to steal your property after you slip up. Uh, no. Nor should you ever use ALL of your own cash if you don't have to. Especially for a flip. I promise you there are a number of HMLs who will fund you 70-80% of your purchase price on a one year note with no prepayment penalty for a reasonable interest rate and fees, and you can have them include 100% of the rehab money or not depending on how you operate with your flips. That part is up to you...but leverage is everything. And you know what else? You can just as easily get a non-recourse hard money loan for maybe another 1-2 percentage points on the rate if you're really concerned about a personal guaranty of the note. When it comes to flippers, there are a number, a ton, a plethora! of national and local HMLs in every state in this beautiful country of ours who want to fund your project with the intent of seeing you succeed, making you a repeat customer, and doing it again for your on your next project. These loans are business purpose bridge loans on non-owner occupied property and everyone involved in the loan process (lender and borrower and escrow/attorney and title company) should be speaking the same language. The language of profit. The borrower makes a profit, and so does the lender. Rinse, repeat. So yes, use an HML @Nick M. What really stands out about your post is that you are from North Carolina and purchasing a flip in New Jersey, and I hope you are comfortable and qualified to do an out of state flip, because that can be daunting. And honestly, the numbers you are throwing out are meh. You're saying the rehab cost is half the cost to buy the house. That's a bad ratio right there already. Then purchase costs, holding costs, and sales costs to make $10-20K in taxable profit, and that's if your rehab doesn't balloon to $50,000 like they often do. If you have the cash to do this yourself, you'd be better off lending out your $100K as a private lender yourself at a max of 60% LTV for 10% interest. That's $10K annualized right there and you'd sleep at night and have all that other free time on your ends not doing a flip in South Jersey. But that's just one person's opinion...

    I don't recall equating HMLs to predatory scumbags but maybe your comments are meant for others. Since that's your profession I can understand the sensitivity. My real job is medical device sales and it's frustrating to hear negative comments on sales people. I appreciate what HMLs do and they need to make money like everyone else...especially given the risk of loaning money to people they don't know to work on a property they'll never see. 

    Thanks for the direct feedback on the deal. My numbers are overly conservative both on the ARV (lower than it should be) and the rehab costs (higher than they probably will be) but I do that to help overcome any emotion/overconfidence that seem to challenge new investors. I modeled best case, worst case and base case scenarios with ARVs and rehab costs so I have a range of potential income. The numbers you're seeing are on the lower end. So anything above is gravy. And I'm learning from mistakes along the way.

    I have homes in both NC and NJ and split time between them so it really isn't a long distance flip...but am aware it will be challenging. I have built in extra rehab time into my carrying costs to account for this.

    Never considered being a private lender before. I enjoy working with my hands and have done significant rehab work on 3 of the 5 houses I've  owned....so that's an additional benefit of taking on a flip for me. I'd be interested in learning more about private lending if you're open to discussing. 

    0Reply
  • Aaron Pfeffer
    Lender · Los Angeles, CA · Member since 2015 · 127 posts · 82 votes
    8y

    Always open for a discussion @Nick M.

    If you Direct Message me your number I will absolutely give you a call.

    1Reply
  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    8y

    @Nick M. You say you have the cash in hand , and you can take out a Heloc .  Why borrow then ?   keep your cash in the bank , use the heloc from another property to buy and rehab the new property .  You still have your emergency fund . The rehab will be free and clear . Sell the rehab , pay off the heloc . If things take longer than expected you still have your cash reserves . 

    I use my heloc all the time , I buy rentals , I pay with the heloc  , fix them up . When they are done I get them financed , then I pay off the Heloc . Fees and interest are minimal .  My back up is if things go south I sell a rental , or make my wife get a second job 

    3Reply
  • Nick M.
    OP
    Investor · Wilmington, NC · Member since 2017 · 29 posts · 10 votes
    8y
    Originally posted by @Matthew Paul:

    @Nick M. You say you have the cash in hand , and you can take out a Heloc .  Why borrow then ?   keep your cash in the bank , use the heloc from another property to buy and rehab the new property .  You still have your emergency fund . The rehab will be free and clear . Sell the rehab , pay off the heloc . If things take longer than expected you still have your cash reserves . 

    I use my heloc all the time , I buy rentals , I pay with the heloc  , fix them up . When they are done I get them financed , then I pay off the Heloc . Fees and interest are minimal .  My back up is if things go south I sell a rental , or make my wife get a second job 

    Good point. Don't think I have enough equity in one property to fund the purchase price and rehab costs, given the HELOC LTV requirements. I guess I was thinking of convenience getting all the money from one place. To your point, I'm paying for that convenience.

    0Reply
  • David Weintraub
    Lender · Berkeley, CA · Member since 2017 · 1k+ posts · 549 votes
    8y

    @Aaron K. is right that if the person is letting their money sit in the bank, unused, earning little interest, then it should be out on the street, in a deal that they believe in.  Could you use hard money to mitigate some risk?  Sure.  But for one deal you truly believe in, you can go on your own.

    That said, it's not necessarily a common scenario.

    Hard money can be used by someone doing their first flip who only has 25% of the loan to do the deal, or someone looking to do 10 deals instead of 3.  It really depends.

    As for the price of it, that also depends.  If you're a first timer and you have the cash, it may take you 8-9 months to do a deal, and that could be expensive with a lender.  Maybe using your own cash makes sense.  But when you're getting into that 10-15-20 flip category, and you know what you're doing, you are paying low interest, low points, and are out in 3-5 months.  It makes sense.

    I too believe that there is this type of disparagement toward HMLs, but it's usually from people who once used them to get to where they are now.  It's almost like this elitist attitude, saying that "I have a private money guy..." Well, now you do.  But you didn't.  And if you need to wear that badge, so be it, but at the end of the day, you are what you put out there.

    I didn't see anything wrong with Aaron's comments.

    And I really think people need to use paragraphs. 

    3Reply
  • Jennifer PetrilloPro Member
    Investor · Asbury, NJ · Member since 2015 · 226 posts · 205 votes
    8y

    Agree with @Aaron Pfeffer, we have been very happy with the HMLs we have used, in spite of paying 12-14% interest. The lending process with both companies we have used was fast, easy and getting rehab draws was manageable (maybe not so great for the contractors who had a wait an extra week to get paid). I also agree that the numbers on this project do not seem too favorable but if it's your first flip, a base hit is all you are looking for, you will learn a ton that you will take with you into your next project. One more comment on HMLs, I have not seen any that will lend purchase price alone without rehab costs. I don't believe you can just buy the property with HML money, they want to finance the rehab as well (People, correct me if I am wrong on this).

    0Reply
  • Aaron Pfeffer
    Lender · Los Angeles, CA · Member since 2015 · 127 posts · 82 votes
    8y

    Thank you @Jennifer Petrillo and yes, you can definitely just buy the property with purchase money funds from an HML. Many will lend to a seasoned flipper at 70-80% LTC (Loan to Cost) with no hold back for rehab. Many appraise value on ARV (After Repair Value), so if they lend to you at 70-80% of purchase with the expectation that you will be improving the property immediately after closing, then that 70-80% becomes 65% net LTV or less based on an agreed upon ARV. Full construction loans are different, as scraping a structure entirely will bring us back to land value pretty quickly, so then an HML or Private Money Lender will absolutely demand control of the construction funds.

    1Reply
  • Kyle Boughton
    Investor · Arcata, CA · Member since 2015 · 76 posts · 34 votes
    8y

    Everyone goes back and forth when talking about Hard Money. My experiences are positive when utilizing hard money. As I built my business I was able to utilize a HML and a HELOC off of my primary home. By doing this I was able to do multiple projects with more profit that out weighed the extra interest and fees I was paying.

    Always good to keep a savings for emergency. I leverage whenever possible. I would shop around and compare all your options and see what works best with your specific scenario and what aligns with your goals.

    Just putting in my 2 cents.

    1Reply
  • Nick M.
    OP
    Investor · Wilmington, NC · Member since 2017 · 29 posts · 10 votes
    8y

    Thanks everyone for your feedback. The bank accepted our offer yesterday. I'm going the HELOC route for now. Will see what the banks come back with for appraisal value of my existing properties...hopefully it's enough to pull enough equity out to pay for everything, if not, at least the purchase. Then I can weigh cash or hard money on the rehab costs.

    Definitely appreciate all of the opinions. Made me think about different options and see things from different perspectives. Wish me luck!

    0Reply
  • Tarik Turner
    Lender · Hackensack, NJ · Member since 2016 · 1k+ posts · 372 votes
    8y

    OPM is the rule, leverage your cash on hand. You can spread that money across 2 or 3 deals and still have a savings account not reading a negative number

    1Reply
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