Getting started with hard money

13 Replies

I am looking to get my first property using a BRRRR strategy to profit on my first rental and then grow from there. I want to use a hard money loan with 100% financing and find a good property to rehab and cash out refinance for some profit after I put a tenant in it. Is this a good strategy to start off with? My goal is to use none of my money and start/grow my rental property portfolio (I have little money to fund deals with hence the 100% financing route). Tips? Cautions?

Hi @Rodrigo Barreiro Pujol . I have not seen the deal, but I can give you a couple items of caution from my experience in private equity and unconventional financing strategies. I am sure there is more others can add, but this is all I can come up with right now. 

Don't let the below deter you--private hard money can be a great way to get around the banks for projects that carry a bit more risk (like a BRRRR).

Hard money is going to come with carrying costs, and this is often used in flipping because of the quick turnaround. On a BRRRR, you have the full rehab (1-3 months-ish depending on the scope of work) and the seasoning period most banks require before financing (6 months or so). I always expect to budget for a minimum of 8 months of carrying interest that either needs to be extinguished with the cash out or paid along the way depending on the terms. Just be sure to account for it!

Also, try your best to make certain your underwriting and rehab budget are rock solid. Backing up your rehab budget with itemized bids would the best way to isolate yourself from risks associated with ballooning costs, as they can get out of hand. You'd hate to run out of money because of an unforeseen issue. 

@Andrew Eherts And so how would refinancing out of a 100% financed hard money loan work? I have to profit enough on the rehab that would bring my equity higher than the refinancing bank's required LTV % to get it refinanced? So what would I do if say, I got 100% financed for a 100k property and 30k for rehab (so 130k hard money loan) and that brought the value of the house to 150k. But in order to refinance, they only let me cash out 80% of that 150k? Does that mean I have to come up with an additional 10k (and then some for hard money fees) to cover the 130k hard money loan since they only let me cash out 120k?

Sorry if that was confusing, just trying to figure out how this "no money down" works 

@Rodrigo Barreiro Pujol not confusing at all! You are correct, the bank will cash you out 70-80% of your after repair value. That is where the hard money can make things a bit more complicated, because not only are you planning your cash out amount but you also have to pay those carrying costs from the hard money lender. 

In your above example, you'd have to come up with that $10k and the carrying costs. Your carrying costs are calculated monthly as the interest rate divided by 12, so that is added for each month you carry the loan. 

You may not cash out 100%, and that's okay! You're "no money down" would turn into "a little money down". Owning a fully financed, newly renovated and rented property valued at $150k for only the $10k needed to take out the hard money lender is not a bad place to be in.

@Andrew Eherts Okay, that is not so bad. Is it possible/hard to actually come out profit where you actually increased the value of the home more than you needed for the 70-80%. Like, the same scenario as above, but the ARV actually ended up being 170k and you actually were able to walk home with 10k profit? What situations would that be possible in and how can I aim for that?

@Rodrigo Barreiro Pujol this is where knowing an appraiser can come in handy. Or knowing roughly what the value components in the market are (how much is a bedroom worth, a bathroom, certain countertops, etc). An appraiser would be able to give you an idea on all of these. For a BRRRR investor starting out, they could be as invaluable as your deal finder because you will know "Okay, this will appraise X if I do A, B, and C."

These are things you pick up on over time, and you can also get a rough idea by looking at renovated comps if there are any. Do houses that get top dollar have certain features? Try to include them if they are financially feasible to do so.

Keep in mind the diminishing returns to a renovation. Values in residential markets are based primarily on what is selling around you and at what price. If you are going for a nicer, higher end rental, try not to overdevelop the property relative to the area. As a hypothetical example, those quartz countertops you shell out for may not actually add as much value as you want them to. 

Remember the bank does not care what an agent thinks the property is worth, because agent's work in price not value. That is the appraiser's domain. 

@Andrew Eherts Thank you so much, you have no idea how much this helped. So it would be a good idea to send out an appraiser before buying the home with a HML so that they can give me a good list of things to get done during renovations to get an optimal ARV? And if the results of the appraisal are not good enough to do the deal, then not move forward with it?

@Rodrigo Barreiro Pujol good advice from @Andrew Eherts here but this is your first rental? Hard money is more varsity level stuff and the penalty for mistakes is going to be high. And you will need cash to pay points/fees on the money. I'd be  a bit surprised if you could get decent terms for 100% down given your level of experience. I'm in a market that has been fairly "flipped out" so I could be off-base about risk tolerance. Seriously though, if your goal is not to do your own money because you are capital constrained? This path could produce a world of hurt. 

@Rodrigo Barreiro Pujol it's a pleasure to help. Perhaps getting a feel from an appraiser as to what carries value is a good bet. I am not sure if you'd be able to bring them out to every deal you do, but having some guiding principles is where I would start. This will help you intentionally plan out the rehab so you only spend money on what gives you a 1x or higher return on value compared to your cost. 

@Jonathan R McLaughlin so what would be a better route to go than hard money if I still wanted to go no money down? My next option I was going to consider was just save up for that 20% down and find a rehab loan I could do. Downside is, I'd like to get started as soon as I could. But if there is a better way to still start now, what would you recommend?

@Rodrigo Barreiro Pujol I hear you, and my good luck wish was sincere, not dismissive. I think there is a lot of wiggle room between no money down and 20% though. FHA or low down payment conventional if you can house hack? Friends and family help with downpayment? 401K loan for partial? A trade or sell another asset (car, boat, snowmobile, motorcycle...you get the idea). You do need some money.

@Jonathan R McLaughlin Oh no worries, I am purposefully looking for criticism if my idea won't work. So if I went the 20% downpayment route, saving up for additional money for rehab will take a while as well. Would I be able to get a loan for just the rehab costs? And would that be feasible? (I want to invest remotely so house-hacking/FHA route wont work for me).

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.

We hate spam just as much as you