First BRRRR, Hard Money vs. Traditional Loan

31 Replies

Hi all,

I'm looking to purchase my first investment property in Cleveland, OH. I plan on utilizing the BRRRR method and am currently feeling torn on whether to obtain the property with hard money vs. a traditional loan. I view the benefits of hard money as being able to purchase a property in cash but obviously with that convenience comes higher interest rates.

I was wondering if others have favorable impressions or experience with one over the other for BRRRRs.

Hi Lesley,

My wife and I have recently purchased our first rental property in Cleveland. This was basically a turnkey property. We felt that this was our safest bet as new investors from out of state. However, we are looking to purchase our second one very soon and plan on using BRRRR. I'm assuming you're looking at a distressed property since you want to use BRRRR. I don't have any first hand experience but from what I understand most banks will not offer a traditional loan on a distressed property. This is why most investors go with hard money loans for BRRRR. We are going to start working on building relationships with good real estate agents and contractors to try and make our next deal happen. On a separate note, we have learned a little bit about neighborhoods in Cleveland. Feel free to send me a message if you would like to pick our brain a bit. I'm sure we could learn from you as well!

Best,

Hi @Lesley Ray & @Michael Simmonds

I flip in Cleveland, and run a full-time construction crew on the east side suburbs. We only do A-B neighborhood flips and keep some as rentals. If you want to go hard money you'll likely have to find something that needs a lot of work. We purchase hard money or cash, but everything we buy needs work. Generally you'll be looking at ARV * .7 minus rehab costs as your number to shoot for on the purchase. For instance, We just bought a foreclosure in Cleveland Heights. The purchase price was 112,000. Hard money loan was for 280,000 (ARV) x .7 = 196,000 - 60,000 = 136,000. So, if you can find a good enough deal, a construction loan will make sense, usually covering 85-90% Loan to cost, and 100% rehab. You should get these terms if you've done 3-4 flips in the past 2 years. If not, generally you'll want to purchase a great deal conventional, then refinance out of it after 6 months seasoning.

I'd be happy to discuss with either of you my experience on my experience investing in Cleveland, as we've partnered with several out of state investors on properties that ultimately end up in their lap. I live in California myself as well, but I grew up in Cleveland so I know the city like the back of my hand!

Originally posted by @Lesley Ray :

Hi all,

I'm looking to purchase my first investment property in Cleveland, OH. I plan on utilizing the BRRRR method and am currently feeling torn on whether to obtain the property with hard money vs. a traditional loan. I view the benefits of hard money as being able to purchase a property in cash but obviously with that convenience comes higher interest rates.

I was wondering if others have favorable impressions or experience with one over the other for BRRRRs.

 There are no benefits to a hard money loan other than they can sometimes be easier to obtain than a traditional loan.

A traditional loan's terms are much much better. On top of that a hard money loan does not allow you to make a "cash" offer. You don't have cash. You are financing. 

If you present a "cash" offer on a property that's listed by a broker who asks for your POF & you send them a HML pre approval odds are very good you will be pushed out of the bidding for that property & never taken seriously again. Don't torch your credibility, worst thing you can do.

Originally posted by @James Wise :

A traditional loan's terms are much much better. On top of that a hard money loan does not allow you to make a "cash" offer. You don't have cash. You are financing. 

If you present a "cash" offer on a property that's listed by a broker who asks for your POF & you send them a HML pre approval odds are very good you will be pushed out of the bidding for that property & never taken seriously again. Don't torch your credibility, worst thing you can do.

James, thank you for clarifying a question I have had for awhile now.  I am looking at purchasing my first fix and flip property soon... I was wondering if I could put in a "cash" offer if I was actually using hard money. It sounds like the answer is NO.

Also, as far as torching one's creditability... my wife knows an investor (from her previous employer) that owns rentals in the area. He suggested I that I put in a cash offer, but then show up at closing with financing. I am no quite sure how that would work... but can you elaborate as to exactly why that is frowned upon?

Regards,

Rob

many use HML for the BRRR strategy my HML company in the day did 300 to 400 of those loans a year through out cash flow rental markets quite common.. conventional loans for out of state flippers are very tough if not impossible to get.

if you live there possible.. 

But bottom line these are usually fairly low value assets IE if they are rentals that make sense your going to pay 30 to 40k for them put 20 to 30k into them and then they are worth about 20% more than you invested maybe a tad more.

if you don't have 30 to 40k in cash you should not do this anyway your under capitalized.. U should only do this with your own personal cash and not borrow any money.

as well as long distance rehab is the MOST RISKY thing you can do in real estate.. your chances of a contractor totally screwing you are high.. so caution..

Originally posted by @Robert Shedden :
Originally posted by @James Wise:

A traditional loan's terms are much much better. On top of that a hard money loan does not allow you to make a "cash" offer. You don't have cash. You are financing. 

If you present a "cash" offer on a property that's listed by a broker who asks for your POF & you send them a HML pre approval odds are very good you will be pushed out of the bidding for that property & never taken seriously again. Don't torch your credibility, worst thing you can do.

James, thank you for clarifying a question I have had for awhile now.  I am looking at purchasing my first fix and flip property soon... I was wondering if I could put in a "cash" offer if I was actually using hard money. It sounds like the answer is NO.

Also, as far as torching one's creditability... my wife knows an investor (from her previous employer) that owns rentals in the area. He suggested I that I put in a cash offer, but then show up at closing with financing. I am no quite sure how that would work... but can you elaborate as to exactly why that is frowned upon?

Regards,

Rob

the closer wont close the deal that way title company or attorney .. they need to know which its going to be and they follow the contact. if it says cash and you don't have cash at closing its not going to close .. the title co or attorney will make you get addendums signed then they need a loan package and lenders insurance etc.. that simply does not happen the way your friend is saying it will.

you can say cash then change during the process just need to get as I state sellers approval and addendi signed around. But many close with HML pre approval letters probably a thousand a day in the us get done if not more. However in really HOT markets were the sellers are looking at a few different offers they may only take cash and not take your offer.

Its just like some sellers of rental properties ( turnkey ) who have such high demand ONLY accept cash offers.. this is common with many. And it does not mean something nefarious is going on it just means there demand for their product allows for it..

Originally posted by @Michael Simmonds :

Hi Lesley,

On a separate note, we have learned a little bit about neighborhoods in Cleveland. Feel free to send me a message if you would like to pick our brain a bit. I'm sure we could learn from you as well!

I would like to pick your brain re: neighborhoods in Cleveland!

Thank you everyone for you responses!

@Michael Simmonds , Thank you for your input. Will PM you shortly.

@Jared Lichtin , the problem I'm running into is that I can't find those HML rates since this is my first one. I'm looking at 70% ARV, ARV min. $120,000. Will PM you shortly.

@James Wise , that's what I thought too but one HML I've spoken with has said they will deposit the funds into my account after I am approved, therefore allowing me to show proof of funds and present a cash offer.

@Jay Hinrichs , typically I would agree that long distance rehab is risky but I have boots on the ground (my parents) to keep an eye on things.

Originally posted by @Lesley Ray :

Thank you everyone for you responses!

@Michael Simmonds , Thank you for your input. Will PM you shortly.

@Jared Lichtin , the problem I'm running into is that I can't find those HML rates since this is my first one. I'm looking at 70% ARV, ARV min. $120,000. Will PM you shortly.

@James Wise , that's what I thought too but one HML I've spoken with has said they will deposit the funds into my account after I am approved, therefore allowing me to show proof of funds and present a cash offer.

@Jay Hinrichs, typically I would agree that long distance rehab is risky but I have boots on the ground (my parents) to keep an eye on things.

 leslie  I would HIGHLY doubt any lender is going to just deposit money into your account. you may be working with someone who is going to scam you.. this is simply NOT done no way no how.

@Lesley Ray There are personal loan options like Sofi. If you have a excellent credit score and a 6 figure income then you can get 80K at 8%. 2 weeks or less to get funds. If you or someone you know has equity in a home they can do a HELOC so you can have cash up front.

Hard Money with double digit interest and points is not the only option for cash if you dont have it. 

The BP book of Low and No Money Down Investing gives many more options. 

Originally posted by @Ricardo Murph II :

@Lesley Ray There are personal loan options like Sofi. If you have a excellent credit score and a 6 figure income then you can get 80K at 8%. 2 weeks or less to get funds. If you or someone you know has equity in a home they can do a HELOC so you can have cash up front.

Hard Money with double digit interest and points is not the only option for cash if you dont have it. 

The BP book of Low and No Money Down Investing gives many more options. 

I have heard of the Sofi  I got to think this is not sustainable if its just a credit score unsecured loan program and everyone should jump in before they close their doors.. there is a reason credit card company's charge what they do for unsecured credit.. I could be wrong but boy to me that is highly risky platform they have going on ..  but like I said get while the getting is good :)  I wonder what happens though when you take out a 80k sofi loan I wonder if that then hammers your fico and you then have a hard time with your refi lender ?? any thoughts on that Ricardo or experience .. I just ask cause I don't personally know.   but for wholesalers to be legal and come into title then resell this seems pretty cool.

Has anyone in this thread been able to accomplish what is talked about in this Bigger Pockets article?

https://www.biggerpockets.com/renewsblog/work-with...

Pretty much they underwrite the rehab costs in the original loan and never actually refinance.  This would be amazing but I have never met anyone who has done this, nor do I know any lenders that I am aware of who will offer this.

@Jay Hinrichs the credit score comment is valid and honestly not something I have thought about. My only debt is my personal home and my score is high.  I think I could handle the hit score hit. This is only one of the options I have been looking at. From what I read, the approval is restricted to a small pool of people. So that may be how they at are hedging their risk of the large unsecured debt. 

My primary funding target is private money. I have a couple friends with high household incomes that I will seek for a private loan for the seasoning period prior to the Refi. 

There are also 401K loans. Many plans allow you to loan yourself 50K as long as you have a 100K vested balance. You just have to be comfortable pulling your funds out of the market for 7+ months. 

@Forrest Holden Don't see how that is possible when you read the rules.  https://www.fanniemae.com/content/guide/selling/b2...

"The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value)."

Maybe the "initial investment" statement is a grey area an attorney can manipulate. Only a few lenders do delayed financing (some don't even know it exist) and the couple I have talked that do it, basically quoted the above statement. 

If you can hold out for 6 months there are more lenders that will do a 6 month seasoning then do Delayed financing.... based on my googleing and a half of dozen convos. 

@Ricardo Murph II What if you use a portfolio lender who doesn't sell to fanniemae?  Conversations with my lender have alluded to this being an option, however they say we would still need 20%-25% down which kind of defeats the point because you won't refi to recapture your initial investment.

@Adam Moore The lender I talked to said delayed financing is 70% LTV of purchase price for them Once your cross the seasoning period the LTV is based on appraised value. Waiting seems like the best way to recoup cost and possible get cash out.

I am curious as you are to see if someone has pulled it off and what lender/ broker they used. 

Originally posted by @Robert Shedden :
Originally posted by @James Wise:

A traditional loan's terms are much much better. On top of that a hard money loan does not allow you to make a "cash" offer. You don't have cash. You are financing. 

If you present a "cash" offer on a property that's listed by a broker who asks for your POF & you send them a HML pre approval odds are very good you will be pushed out of the bidding for that property & never taken seriously again. Don't torch your credibility, worst thing you can do.

James, thank you for clarifying a question I have had for awhile now.  I am looking at purchasing my first fix and flip property soon... I was wondering if I could put in a "cash" offer if I was actually using hard money. It sounds like the answer is NO.

Also, as far as torching one's creditability... my wife knows an investor (from her previous employer) that owns rentals in the area. He suggested I that I put in a cash offer, but then show up at closing with financing. I am no quite sure how that would work... but can you elaborate as to exactly why that is frowned upon?

Regards,

Rob

 1. This investor sounds like an a##hole so you should stop taking advice from him.

2. Savy Sellers are going to ask you for proof of funds after you make your cash offer. What do you do now? Now you are caught in a lie & stuck showing the seller that you have no cash. Who is going to do business with a broke liar?

Originally posted by @Jay Hinrichs :
Originally posted by @Ricardo Murph II:

@Lesley Ray There are personal loan options like Sofi. If you have a excellent credit score and a 6 figure income then you can get 80K at 8%. 2 weeks or less to get funds. If you or someone you know has equity in a home they can do a HELOC so you can have cash up front.

Hard Money with double digit interest and points is not the only option for cash if you dont have it. 

The BP book of Low and No Money Down Investing gives many more options. 

I have heard of the Sofi  I got to think this is not sustainable if its just a credit score unsecured loan program and everyone should jump in before they close their doors.. there is a reason credit card company's charge what they do for unsecured credit.. I could be wrong but boy to me that is highly risky platform they have going on ..  but like I said get while the getting is good :)  I wonder what happens though when you take out a 80k sofi loan I wonder if that then hammers your fico and you then have a hard time with your refi lender ?? any thoughts on that Ricardo or experience .. I just ask cause I don't personally know.   but for wholesalers to be legal and come into title then resell this seems pretty cool.

I have a personal loan with Sofi. They are pretty big on credit score and they have to verify your income. So if you don't have over a 720 credit score and aren't making at least $75k in verifiable income, you aren't getting approved. That profile is fairly low risk.

Also. The rates are closer to 11-12%. not 8%.

Originally posted by @James Wise :

 1. This investor sounds like an a##hole so you should stop taking advice from him.

2. Savy Sellers are going to ask you for proof of funds after you make your cash offer. What do you do now? Now you are caught in a lie & stuck showing the seller that you have no cash. Who is going to do business with a broke liar?

Well, he's is very friendly and does not seem like an a##hole... but your point is well said... As my wife an I get into REI for the first time... we prefer to be upfront with everyone we deal with. We are new and willing to learn, but we also perform our due diligence as best as we can. We are not trying to get rich quick or pull some shady stunts just to turn a fast buck. Just making any profit and gaining valuable experience are our main concerns at this point.

As for financing our first deal... We are working with a portfolio lender (at this very minute) and expect to get qualified for an interest only rehab loan for purchase price plus repair cost with 20% down. We feel pretty "savvy" alright! LOL; super excited... and terrified at the same time!

Regards,

Rob   

@Greg Bruns , it's true. Sofi is decent (at least they have been for me). I have a $45k personal loan with them and it's at 7.8%. I have had it since 2016 and they do require high scores and income.

Originally posted by @Mindy Jensen :

Tagging @Alexander Felice who wrote the article referenced above. 

 Thanks Mindy

@Forrest Holden There are naysayers who say you cant pull out more than purchase price out of delayed finance: they are dead wrong. 

You put the rehab on the HUD-1. Simple as that. The fannie mae rule is 75% ltv or 100% HUD whichever is lower. So put the rehab (and insurance) on the there and you can pull it out. It works within the fannie guidelines so any lender can do it, you just need a competent one. 

I've done it, and it's fast. last one was less than 9 weeks total turnaround from house close to refi close. 

Alexander Felice, I purchased a property that I will be putting 10k of work into for 65,500 a month or two ago with a 15% down payment. The house appraised for 75,000, as is, 1 week before closing. At 15%, I still had to pay PMI despite the appraisal. I also tried to get the lender to decrease the down payment required as a result of the appraisal, but they wouldn't budge. I did get really reasonable closing costs for the most part, so I was happy about that. Do you have any tips, tricks, or recommendations on how I could have done better with the lender by negotiating with the appraisal results?

Do you think I could have done betterwith the financing, or, gotten more of the costs of this deal financed based upon the information that I have provided you with?

-Forrest Holden

Negotiating appraisals is not what I would recommend.

Instead, learn how to estimate ARV better. Use realtors to get you comps, always assume you'll get the lower end, and be strict about basing your purchase price off this number and correct rehab. If the numbers don't line up, then don't move forward.

I think the problem you've run into on this deal is that your cost basis is too close to retail . Next time pay less. At a 75K ARV you would want your total all-in cost to be no higher than $56,250.

down the road if the house appraises you can refi once you get to 80% and drop the PMI. I don't know of any fix to get your position better, more useful to learn how to do it better next time.

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