New Investor: Go Conventional or Use Hard Money?
NJ · Member since 2021 · 14 posts · 8 votes
I'm a new investor seeking my first SFH. I have enough cash to cover a 20% down payment and repairs but would like to use as little of my own money as possible. I plan to buy in the next 90 -120 days, then cash out refi to purchase another property by end of 2QCY24 and do the same to obtain a multifamily by year-end 2024. For my first property and to deliver on this strategy, should I look for something turnkey and needing little reno and go conventional OR look for something I can get for 80% of purchase price, force equity through reno, and use hard money to cover down payment and reno costs?
I'm looking at the advice you've gotten so far on this thread and my mouth is hanging open.
The overwhelming consideration you need to think about is that it is currently MID-JUNE. It is the height of the construction season. Most contractors worth a damn are already booked solid for the next two months. Just how the hell we've gotten this deep in the thread and none of the people who have replied to you have given that any consideration whatsoever except for @Greg Scott is completely, utterly beyond me. If you go the heavy renovation route, YOUR BIGGEST PROBLEM HERE IS NOT THE MONEY. Unless you get incredibly lucky, it takes years to build up a good, deep list of trusted local contractors to work with and gain the knowledge and experience of how to work well and profitably with each of them.
Granted, it's a money forum, but someone's got to tell you at least something of the honest truth, instead of trying to sell you a mortgage product and cash in on what is most likely to be your eventual misery.
For a first deal, its usually better that it be a decent investment with a lower degree of complexity.
Assuming you know how to manage rehab and know how to find a good deal (purchase price + rehab + closing is much greater than ARV) using hard money makes a lot of sense. I'd choose that over waiting for a cash-out refi. If you do the math, you really end up at about the same financial place. Personally, I'd rather have that cash in the bank than tied up in equity that isn't working hard for me.
@Jamy Lomento Good morning. Finding distressed properties to rehab that will increase value is always a better strategy as long as you have the right team in place to execute successfully. Specifically, having the right GC in place that can be trusted and will complete the project on time, on budget and correctly.
I want to point out another issue based on you being a first time investor. The 3 things that lenders need to underwrite with respect to the sponsor (borrower) are credit, liquidity and experience, especially today with the current state of the economy, political uncertainty, etc. Being a first time investor is an issue and it sounds like liquidity might be an issue as well.
I would suggest that you consider taking on a partner for your first deal that will solve the experience and liquidity issue. Hope this helps. Happy to jump on a call to discuss further!
Bobby
This would be your first investment property, but do you own a primary residence? If not, could look into an FHA loan, which may help you get in at a low down payment. Hard money is a good short-term debt instrument for rehabs.
I'm a new investor seeking my first SFH. I have enough cash to cover a 20% down payment and repairs but would like to use as little of my own money as possible. I plan to buy in the next 90 -120 days, then cash out refi to purchase another property by end of 2QCY24 and do the same to obtain a multifamily by year-end 2024. For my first property and to deliver on this strategy, should I look for something turnkey and needing little reno and go conventional OR look for something I can get for 80% of purchase price, force equity through reno, and use hard money to cover down payment and reno costs?
So, hard take on the financing aspect of your question. The only way to know what financing option is good for you, especially with regards to qualifying, and monthly cashflow after expenses, is to get loan pricing/ a rate and terms sheet from a couple of lenders and then compare the options before you proceed. Do that with regards to credit, downpayment amount, rate lock period, originator compensation type(lender paid/borrower paid), etc. Then compare.
The only way to know what loan type option you should use is to get pricing first. That being said, pricing(and rates) change multiple times a day until you lock. Pricing is basically a quote until you lock. However, it will give you an idea of what your principal & interest, mortgage insurance will be if you get that loan, as well amount of money needed if you want to buy down rate will be/the amount of lender credit you could get towards closing costs.
i hope all I've said has been meaningful
@Greg Scott - Appreciate the response. Keeping the cash working for me in what I'm interested in and agree that, depending on the property, I could end up in the same place. I also wonder about the impacts of falling home prices on my strategy.
@Bobby Feinman Thanks for the info. In your scenario, liquidity isn't my problem, but experience would be. I just want to use leverage instead of forking over my own funds inasmuch as possible.
@Bobby Feinman Thanks for the info. In your scenario, liquidity isn't my problem, but experience would be. I just want to use leverage instead of forking over my own funds inasmuch as possible.
Happy to jump on a call to discuss further!
@Dennis Muno Totally tracking with what you're saying. I'm looking at lenders in the area I want to purchase now to see the rate variety. I have an idea of a few different areas of my investment areas to focus on, and I'm sure that will have an impact as well.
@Account Closed - I sold my primary residence in November 2022. I could see FHA as an option.
I'm looking at the advice you've gotten so far on this thread and my mouth is hanging open.
The overwhelming consideration you need to think about is that it is currently MID-JUNE. It is the height of the construction season. Most contractors worth a damn are already booked solid for the next two months. Just how the hell we've gotten this deep in the thread and none of the people who have replied to you have given that any consideration whatsoever except for @Greg Scott is completely, utterly beyond me. If you go the heavy renovation route, YOUR BIGGEST PROBLEM HERE IS NOT THE MONEY. Unless you get incredibly lucky, it takes years to build up a good, deep list of trusted local contractors to work with and gain the knowledge and experience of how to work well and profitably with each of them.
Granted, it's a money forum, but someone's got to tell you at least something of the honest truth, instead of trying to sell you a mortgage product and cash in on what is most likely to be your eventual misery.
buying something below market value, fixing and then refinancing is a BRRRR. and to successfully execute a BRRRR, you need to buy waaaaaaaaaaaay below market value - not 80%. more like 40-50%. and there are lots of costs involved in a BRRRR that get overlooked on BP - closing costs, holding costs, financing costs, refi costs. these can be tens of thousands of dollars. the simplistic formula of, for example, buy for 100 rehab for 50 refi at 200 is way off and understates the costs involved. i even heard david greene say on a recent podcast that you can get 80% LTV on a refi. but i'm seeing 65-70%.
and also... as others in this thread noted, despite the hype, hard money lenders don't just hand out 100% of needed funds. hard money... requires a down payment just like conventional unless you have a long track record or some kind of unique relationship with a specific lender. and to go back to my first point, if you don't knock the equity increase out of the park, the HML is due, and you'll have to cover it with your own cash. HML just isn't a panacea. it's actually high cost and high risk.
not trying to be discouraging, just trying to be realistic.
some kind of live-in flip or house hack would be lower risk. are you looking at properties and talking to lenders? Or still in the planning stage?
I'm a new investor seeking my first SFH. I have enough cash to cover a 20% down payment and repairs but would like to use as little of my own money as possible. I plan to buy in the next 90 -120 days, then cash out refi to purchase another property by end of 2QCY24 and do the same to obtain a multifamily by year-end 2024. For my first property and to deliver on this strategy, should I look for something turnkey and needing little reno and go conventional OR look for something I can get for 80% of purchase price, force equity through reno, and use hard money to cover down payment and reno costs?
Getting a good deal will help out a ton no matter which way you run the funding.
buying something below market value, fixing and then refinancing is a BRRRR. and to successfully execute a BRRRR, you need to buy waaaaaaaaaaaay below market value - not 80%. more like 40-50%. and there are lots of costs involved in a BRRRR that get overlooked on BP - closing costs, holding costs, financing costs, refi costs. these can be tens of thousands of dollars. the simplistic formula of, for example, buy for 100 rehab for 50 refi at 200 is way off and understates the costs involved. i even heard david greene say on a recent podcast that you can get 80% LTV on a refi. but i'm seeing 65-70%.
and also... as others in this thread noted, despite the hype, hard money lenders don't just hand out 100% of needed funds. hard money... requires a down payment just like conventional unless you have a long track record or some kind of unique relationship with a specific lender. and to go back to my first point, if you don't knock the equity increase out of the park, the HML is due, and you'll have to cover it with your own cash. HML just isn't a panacea. it's actually high cost and high risk.
not trying to be discouraging, just trying to be realistic.
some kind of live-in flip or house hack would be lower risk. are you looking at properties and talking to lenders? Or still in the planning stage?
Appreciate the info. The numbers I'm running when looking at properties are reflective of this. I'm looking at a house hack for the future, but not now. And yes, I'm both looking at properties and talking to lenders.
I'm a new investor seeking my first SFH. I have enough cash to cover a 20% down payment and repairs but would like to use as little of my own money as possible. I plan to buy in the next 90 -120 days, then cash out refi to purchase another property by end of 2QCY24 and do the same to obtain a multifamily by year-end 2024. For my first property and to deliver on this strategy, should I look for something turnkey and needing little reno and go conventional OR look for something I can get for 80% of purchase price, force equity through reno, and use hard money to cover down payment and reno costs?
Getting a good deal will help out a ton no matter which way you run the funding.
I am positive I'll have to look at a ridiculous number of properties to find something that will work for me. I'm not afraid to part with my money, but would prefer OPM where I can. In talking with some lenders from my local REIA, I do have some options that could work, but everything has to align.