Conventional or Hard Money Lender for first investment property

8 Replies

Hi all - buying our first investment property (two partners and myself). We are based in LA and will be buying in the midwest. Purchase price will be between $50-75k.

Question: What do people recommend - hard money lender or traditional mortgage?

Our Goals: Purchase by May, if not before. Purchase single family home or duplex with minor renovations needed (if any). Buy and hold. Location: Midwest (looking at Kansas City, Indy, Cleveland, St. Louis, etc.). Would like to have the property in an LLC for liability purposes. 20% down is our plan.

I am open to either and see the benefits to both. I am not fearful of HML as I've interacted with them in my real estate law work off and on for my clients. The traditional mortgage with a bank or credit union is appealing because of the stability but also like the flexibility and speed of HML (such as buying cash only homes). Your thoughts and tips would be appreciated.

Bonus question: LLC process. I can start the LLC on my own and write the operating agreement, etc. but haven't researched fully on buying the property in the LLC name or buying in our names then transferring it into the LLC. I know to look out for loan rules such as due on transfer clauses etc. but further advice would be great. Thanks!

 

Originally posted by @Kellan Martz :

Hi all - buying our first investment property (two partners and myself). We are based in LA and will be buying in the midwest. Purchase price will be between $50-75k.

Question: What do people recommend - hard money lender or traditional mortgage?

Our Goals: Purchase by May, if not before. Purchase single family home or duplex with minor renovations needed (if any). Buy and hold. Location: Midwest (looking at Kansas City, Indy, Cleveland, St. Louis, etc.). Would like to have the property in an LLC for liability purposes. 20% down is our plan.

I am open to either and see the benefits to both. I am not fearful of HML as I've interacted with them in my real estate law work off and on for my clients. The traditional mortgage with a bank or credit union is appealing because of the stability but also like the flexibility and speed of HML (such as buying cash only homes). Your thoughts and tips would be appreciated.

Bonus question: LLC process. I can start the LLC on my own and write the operating agreement, etc. but haven't researched fully on buying the property in the LLC name or buying in our names then transferring it into the LLC. I know to look out for loan rules such as due on transfer clauses etc. but further advice would be great. Thanks!

 

 Finding a traditional mortgage at that price point will be difficult.  Look up small banks in the area that you're investing in and see if they can help.  If you're not looking to fix up the homes and buy turn key, I think small banks or private money should be looked at before HM.

Regarding the due on sale clause. If you take out a Fannie Mae loan, they now allow you to finance the property personally and then transfer to and LLC that is majority owned by the borrowers on the loan, without it triggering a due on sale clause. They changed that rule back on 6/1/2016. See below:

Also, Hard Money is best if you are in a competitive situation or market. The speed of closing is what will get you the deal over others using conventional financing. The hard money lender can also fund the rehab. Then when done, refinance to a Fannie Mae loan on a personal basis and then transfer to the LLC.

If your not in a competitive situation and the property doesn't need a rehab, then Conventional / Fannie Mae is the best way to go followed by the transfer to the LLC.

I hope this helps?

@Kellan Martz nice to see a fellow attorney in the forums! Obtaining financing on a property with a purchase price in the $50k - $75k range is a bit tough. Since you mentioned you're renovating, I think the best way to go about funding this is with hard money. Most hard money lenders have a minimum loan amount o $50k, $75k, or $100k+. I would try and target the $65k - $75k range and a rehab budget of $25k, that way you'll be $75k+ in loan amount and should qualify for most HML. Something else to consider is what your ARV will be. You don't want your money tied up in the property without an exit. I would always target an ARV of $108k+, so that 70% is $75k+ and again will qualify you with most 30 yr lenders.

@Kevin Romines this helps a lot. To clarify my comment, minor renovations for us is under $3,000 - meaning basically looking to purchase a property that is ready to rent and possibly with a tenant in place. We just plan to have a small budget to address small issues at purchase time. @George Despotopoulos always good to see attorneys hanging out at BP. We won't be doing any renovations beyond just small clean up (see above). At least for our first purchase.

@Kellan Martz start looking for local hard money lenders / private money lenders. They'll be most comfortable with lending at a lower loan amount since they'll have a better grasp/handle on the market. Forum is a great place for that. There's also a private lender link website that may be helpful as it's a database of private/hml. 

With conventional financing still at crazy low rates, if you are buying anywhere near market value, I would go with conventional financing. There are banks that loan on properties under $50K. I have one for $30K. If you you are able to buy/rehab at less than 70% of market value, a HML is good tool to buy quickly and rehab. Then you can refi to a low rate loan shortly thereafter. However, many conventional lenders won't lend to LLCs. Some allow you to quick claim deed to an LLC after the fact without enacting the due on sale clauses. Others don't. If you are dead set on buying in an LLC, private/commercial lenders are the way to go. Their rates fall in between conventional and HMLs. A common rate is currently 7.25% for a long term loan. These lenders are also usually easier to work with the traditional banks. Good luck!

I think you should consider the partnership structure. Why do you have 3 partners in LA to buy one $50K to $70K house in the Midwest? (I'm not being rhetorical - what is each person's responsibility/what are they bringing to the table. Is it just dividing the capital contribution by 3?) The multi member LLC is going to cost you $800 every year in California (even if you open in another state, you need to register in CA since the owners are CA residents ...) You will also spend between $500 and $1500 each year filing taxes for the LLC since it is multi member. The Operating Agreement is VERY important for multimember LLC's. If the other partners are not attorney's, you definitely shouldn't do this yourself and still probably not if they are attorney's in my opinion

How many homes are you planning to buy this year? You will probably need at least 3 just to pay for your entity and administrative costs.

Of course, you should consult your advisors as I’m not a CPA, attorney, etc. but sharing my experiences.

On the lending front, I would only go with Hard Money or Private money if you are planning to add significant value (buying under market would count as @John Koster pointed out). Otherwise, it is going to be a waste. Also, as many have said - that price point will be difficult to find long term financing. Not impossible, but difficult. Also, when you are calling banks - be sure to let them know the borrower is in California. That is a problem for some banks and you want to find out earlier if that is the case.

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