Hard money lender for down payment?

9 Replies

Hi all, 

I recently found a multi-unit (duplex) property I am interested in the Bucks County, PA area. The property is a duplex with 2br/1 bath each unit, with monthly cash flow of $2500 month when both units are rented. Both units are currently rented and tenants have 7 months left on their lease. I recently was pre-approved for a loan up to $200k, at 4.75%, 30 year fixed. With the current taxes, the loan estimate for the bank would be roughly $1000 a month with 25% down. The property costs $255k, so with 25% down, I would need $63,750 for down payment. I was planning on using a private investor but that may fall through. I was now looking into a hard money lender to use only for the down payment. Has anyone used this strategy for a down payment before? Essentially I would have a mortgage with the bank for the loan of the house, and a monthly payment for the hard money lender lending the down payment money. With the current cash flow and mortgage around $1000, if the hard money loan was under $1000, it would still bring in a good amount of cash flow. I would prefer much lower, but not sure the max you can stretch a loan like that. I only have had experiencing with conventional loans when purchasing the home I live in. This property would be 100% investment/rental income buy and hold. 

Any recommendations would be very helpful. 

So when rented, it grosses $2500/mo and the asking price is $255k?  Just making sure. That should pencil out depending on age and condition & utility & tax rates, but far from a home run.  HMLs are usually used to stop-gap a home run for 6 months or so.  A year at most.  A buy and hole time horizon is way to long for them (for the most part) and you wouldn't want to pay 12+% for longer than you had to anyway @Matt Z.

Oh - and they generally charge 4+points as an origination fee. Extremely expensive for a marginal deal. I'd pass on the HML idea for this scenario!

You mentioned that you own a home- if you have some or enough equity in your house you could get a HLOC to make up the rest of the payment or to split it with the hard money. This may be a stretch to assume but with 100% financing I am assuming that you have calculated and planned for contingencies? What would happen if you use all of your liquidity on this property and there is a maintenance issues before you are able to build up reserves is a question we need to be aware of and comfortable with the answer.

@Matt Z. won't happen... no HML is going to give you 100% loan which is in essence 100% of arv.. even the govmint won't do that on FHA .

If you have no down payment then you need and equity partner that is your cash.. with out that your just wasting time and should be spending time on the equity partner before you worry about buying something that won't happen

Thanks all. Seller financing is not an option for this owner. 

I currently have a private equity investor in place for the down payment, and the bank loan was approved with that. (Proof of down payment/funds was already sent to bank and approved). There is a chance the investor may back out however, if so, I wanted to plan a back up. 

I have not used a HML before, so this is great insight, and much appreciated.

I do have 20k in savings I could use if needed + 7k reserves I set aside, however the original plan was to use a bank loan + equity investor. 

The renters pay all utilities, and current owner pays for septic clean up each year. 

Sorry. As @Jay Hinrichs and others indicated, ain't gonna happen with a Hard Money Loan. Keep in mind that your first position lender most likely won't allow a second position loan to happen for the deal to close. And HML people really don't do second position. Unless you are at a stupid low LTV to start with. Realistically you have to have a JV or equity partner to do this unless you can pony up the down payment on your own.

So how is the HML different that a private investor? Why will a bank agree to a private investor providing the down payment over a HML? How does the private investor protect themselves if they are not a first or second on the loan? Are they on the deed/title?

Never use debt for your down payment. The down payment is the first part of the value of the property to go away if something happens and you have to fire sale or something else. So I'll repeat, NEVER use debt for your down payment. The structure that you are thinking of, having an equity partner, is the best move you can make in coming up with down payment money.

Others also touched on that HML won't do these kinds of loans which is accurate. They typically won't go over 60-70% purchase price (maybe ARV) for a loan, and are expensive for origination and interest.

Hope this helps. Good luck!

Did this deal actually go through from Sept? Any update?

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