Hard money loan for down payment

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Hard money loan for down payment

Ryan Kraemer
Real Estate Agent · Member since 2018 · 8 posts · 2 votes

Hello everyone!

Looking to see if anyone has used hard money for a down payment on a commercial loan. Would love to hear how you worked that out with the hard money lender and commercial lender. Also what terms you got on the hard money. Thank you!

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  • Charles Carillo
    Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes
    3y

    @Ryan Kraemer

    I have never used hard money as a down payment but I would be very careful with this strategy. First off, most HMLs want to be first position, so many will pass on this strategy from the beginning. Secondly, you will be paying a much higher rate for the hard money and it will have a much shorter term when compared to most commercial loans. So not only does the property need to pay the hard money debt, the commercial 1st position debt and pay all expenses; it also needs to generate enough cashflow to pay off the hard money in 12-24 months. This is difficult. Not to mention the rising interest rate environment we are in right now. 

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  • Ryan Kraemer
    OP
    Real Estate Agent · Member since 2018 · 8 posts · 2 votes
    3y

    @Charles Carillo understandable. I appreciate the input. I’m aware of the precautionary measures to be taken, more wondering how it’s done.

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  • Alex BreshearsBusiness Member
    Lender · Springfield, MO · Member since 2020 · 354 posts · 504 votes
    3y

    From a lender's perspective there is no advantage to being in 2nd position at 100% combined loan to value on any property, so this exact product is likely to not exist. If you own another property outright, you may be able to do some sort of cash out refi and get cash pulled from that for the downpayment on another property, or depending on the lender for the commercial loan, they may accept cross collateralized properties with enough equity as downpayment. 

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    3y
    Quote from @Ryan Kraemer:

    Hello everyone!

    Looking to see if anyone has used hard money for a down payment on a commercial loan. Would love to hear how you worked that out with the hard money lender and commercial lender. Also what terms you got on the hard money. Thank you!


    Commercial lender won't allow borrowed funds for the down payment. You can use your draws from a HELOC to fund the downpayment though.

    You are better off doing a cross collateralized hard money loan to achieve 100% financing. Make improvements on the property and then refinance into something fixed. 

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  • Marty JohnstonPro Member
    Lender · Wauwatosa, WI · Member since 2016 · 571 posts · 204 votes
    3y
    Quote from @Ryan Kraemer:

    Hello everyone!

    Looking to see if anyone has used hard money for a down payment on a commercial loan. Would love to hear how you worked that out with the hard money lender and commercial lender. Also what terms you got on the hard money. Thank you!


     I'd echo most of the aforementioned, but to confirm, when you say "Commercial Loan" I presume you're referring to a long-term financing note, not a short term value-add scenario is that right? If so, I usually strongly advise against this with my clients, as it leaves to being over-leveraged in a tough spot, and will also eat away at cash flow QUICKLY because Hard Money or Unsecured Debt will be much more expensive.

    That said, in a value-add or new construction build where your forcing appreciation, gap funding such as this can be tremendously valuable to scaling so long as your numbers and ARV support it. I still only advise using Gap Funding for 100% leverage when you're still under 70-75% of the ARV so you can sell or refinance out both the 1st mortgage + the gap funding (unsecured funding) note. Or, instead of paying off the unsecured note, roll it into your next project and keep it working for you! Much cheaper than paying new set of closing costs for every project each time you need it so long as you have continual deal flow to sink it into.

    Hope this helps!

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  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    Hard money is not going to take a second lien position on a property. I would try to find a private investor and put them on a promissory note 

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  • Nikhil Rakesh
    Member since 2022 · 5 posts · 5 votes
    3y

    Hard Money loan for down payment is not recommended on any given day

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