Professional · Towson, MD · Member since 2015 · 14 posts · 5 votes
Hello BP!
I am looking to do my second deal in an effort to continue building my rental portfolio. Right now I'm short on cash, could pull together some private investors however that would take more time then I wish to spend, so I'm trying to figure out whether to pursue a live in "househack" with conventional financing or a hard money loan and aim to do a rate and term refi. I know a lot is contingent upon my numbers and purchase price but generally speaking which option would YOU pursue and why? I have never used hard money and am unfamiliar with rate and refis.
I had a great experience doing a house-hack for my first duplex property to get my feet wet. It had a rate of 3.875% fixed / 30yrs. If it were not owner occupied, I recall the rate would have been closer to 4.5 - 5%.
Later that same year I turned around and wrote a private money deal for someone and I'm charging them 12% with a one-year maturity. If the market rate for private money was much lower than that, they would have got their money elsewhere.
All else held equal... if you have the opportunity, personal flexibility, and down payment cash to do a house-hack through a conventional lender, I would leverage those factors in your favor. You will secure yourself a much lower rate for the long-term in a single transaction. Why pay ~12% for hard money for a year or three years, go through the hassle of refinancing to conventional, and ultimately end up with a higher long-term rate after interest rates have risen?
On the house hack: Your rate may vary depending if you are using an LLC (I'm not). Owner-occupancy rules may also vary depending on lender -- but I had to transfer cities for work within a few months of purchase, and the lender had no problems with that. Also -- look into doing an FHA loan. I chose to do 20% down for my conventional loan, but you could perhaps qualify for 3.5% if the deal meets FHA requirements.
I had a great experience doing a house-hack for my first duplex property to get my feet wet. It had a rate of 3.875% fixed / 30yrs. If it were not owner occupied, I recall the rate would have been closer to 4.5 - 5%.
Later that same year I turned around and wrote a private money deal for someone and I'm charging them 12% with a one-year maturity. If the market rate for private money was much lower than that, they would have got their money elsewhere.
All else held equal... if you have the opportunity, personal flexibility, and down payment cash to do a house-hack through a conventional lender, I would leverage those factors in your favor. You will secure yourself a much lower rate for the long-term in a single transaction. Why pay ~12% for hard money for a year or three years, go through the hassle of refinancing to conventional, and ultimately end up with a higher long-term rate after interest rates have risen?
On the house hack: Your rate may vary depending if you are using an LLC (I'm not). Owner-occupancy rules may also vary depending on lender -- but I had to transfer cities for work within a few months of purchase, and the lender had no problems with that. Also -- look into doing an FHA loan. I chose to do 20% down for my conventional loan, but you could perhaps qualify for 3.5% if the deal meets FHA requirements.
My husband's first house was right off of Chinquapin Pkwy, 4 miles from Towson. It was a legal 2 unit. We lived downstairs and the upstairs had our tenants. there are a ton of those up that way.
Mortgage was 550 and the people upstairs paid 450. Times have changed, but the FHA, multi family house hack is still very alive and a great resource who have the flexibility and little cash.
@Tim Johnson Thank you for weighing in I appreciate your thoughts! I wouldn't implement an LLC until after I have moved out of the property making it a full blown rental. Are better rates offered to individuals opposed to LLC's? Hard money looks good until you have to pay for it, how does the rate and term refi's usually work?
@Andrew Nugent With an LLC you'd probably have to go through the commercial lending department at the bank. Typically I think they require a variable rate versus a fixed rate, which would be less attractive to me currently considering that interest rates are likely to continue rising.
I am honestly not too familiar with refi's since I've never done one before. All I can say is... if my hard money debtors approached me today and asked to refinance their note, my first question to them would be: "Refinance as in pay off the note now with money you borrowed from someone else?" In that case, sure. Or... "Refinance as in re-negotiate our agreement for a longer maturity and lower rate?" My response to that would all depend on what they've done with their property since I loaned them money, as well as what my other investment opportunities are at that moment.
My vote would be for a house hack. The low money down is just too appealing to me, especially if you are eligible for a FHA loan. I also only like being on the hook to immediately fix one side of the duplex immediately while being able to take your time on the one you are living in. Especially in the case you outlined where you don't have a ton of capital to stick into rehabs/fixing it up.