Heloc Vs Hard Money Loan
New to Real Estate · Yulee, FL · Member since 2024 · 3 posts · 3 votes
Heloc Vs Hard Money Loan
Most Popular Reply
Hello Damion Brown,
When deciding between a HELOC and a hard money loan for your BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy in Philadelphia, there are several factors to consider beyond the interest rates. Each option has its pros and cons that can impact your investment strategy and overall success.
HELOC (Home Equity Line of Credit)
Pros:
Lower Interest Rates: HELOCs typically offer lower interest rates compared to hard money loans.
Flexible Terms: You only pay interest on the amount you draw, providing flexibility in how much you borrow and when.
Revolving Credit: As you pay down the principal, the available credit replenishes, allowing you to use it for multiple projects.
Longer Repayment Periods: HELOCs often have longer repayment periods, which can make managing payments easier.
Cons:
Qualification Requirements: HELOCs require good credit and sufficient equity in your primary residence.
Secured by Your Home: Your primary residence is collateral, which means a default could risk your home.
Variable Interest Rates: HELOCs often have variable rates, which can increase over time.
Hard Money Loan
Pros:
Easier Qualification: Hard money lenders focus more on the property’s value and potential rather than your credit score.
Speed of Funding: Hard money loans can be approved and funded quickly, which is beneficial in competitive markets.
Flexible Use: These loans are designed for real estate investments, making them suitable for purchase and renovation costs.
Cons:
Higher Interest Rates: Hard money loans typically have higher interest rates and fees compared to HELOCs.
Short-Term Loans: They usually come with short repayment terms (often 12-24 months), requiring a quick turnaround on your project.
High Fees: Origination fees and other costs can add up, increasing your overall project expenses.
For a BRRRR strategy, a HELOC might be the better option if you qualify and have sufficient equity in your primary residence. It offers lower costs and greater flexibility, which can be crucial when managing rehab projects. However, if you need fast access to funds or have difficulty qualifying for a HELOC, a hard money loan could be a viable alternative, especially if you have a clear plan to refinance quickly. I hope this helps you out. Feel free to message me with more questions as they come.
Ty Coutts - Aslan Home Lending 543 Reviews
6 Replies
Hello Damion Brown,
When deciding between a HELOC and a hard money loan for your BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy in Philadelphia, there are several factors to consider beyond the interest rates. Each option has its pros and cons that can impact your investment strategy and overall success.
HELOC (Home Equity Line of Credit)
Pros:
Lower Interest Rates: HELOCs typically offer lower interest rates compared to hard money loans.
Flexible Terms: You only pay interest on the amount you draw, providing flexibility in how much you borrow and when.
Revolving Credit: As you pay down the principal, the available credit replenishes, allowing you to use it for multiple projects.
Longer Repayment Periods: HELOCs often have longer repayment periods, which can make managing payments easier.Cons:
Qualification Requirements: HELOCs require good credit and sufficient equity in your primary residence.
Secured by Your Home: Your primary residence is collateral, which means a default could risk your home.
Variable Interest Rates: HELOCs often have variable rates, which can increase over time.Hard Money Loan
Pros:
Easier Qualification: Hard money lenders focus more on the property’s value and potential rather than your credit score.
Speed of Funding: Hard money loans can be approved and funded quickly, which is beneficial in competitive markets.
Flexible Use: These loans are designed for real estate investments, making them suitable for purchase and renovation costs.Cons:
Higher Interest Rates: Hard money loans typically have higher interest rates and fees compared to HELOCs.
Short-Term Loans: They usually come with short repayment terms (often 12-24 months), requiring a quick turnaround on your project.
High Fees: Origination fees and other costs can add up, increasing your overall project expenses.For a BRRRR strategy, a HELOC might be the better option if you qualify and have sufficient equity in your primary residence. It offers lower costs and greater flexibility, which can be crucial when managing rehab projects. However, if you need fast access to funds or have difficulty qualifying for a HELOC, a hard money loan could be a viable alternative, especially if you have a clear plan to refinance quickly. I hope this helps you out. Feel free to message me with more questions as they come.
Ty Coutts - Aslan Home Lending 543 Reviews- Lender · Lake Havasu City, AZ · Member since 2024 · 700 posts · 285 votes2y
Both hard money and heloc's are useful products... Heloc's on investment property are actually much more pricier & restrictive than hard money.. In this market I would recommend hard money, would love to connect and discuss your options however!
- 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@Account Closed Why not just use a bank originated construction loan that converts to a permanent loan? There's ways to negotiate earn outs, build in soft costs etc. to help recoup the majority of your capital without the need to spend the time or expense on a refinance. Lower price point projects like you describe are generally the best candidates. I find many spend unnecessarily on transactional costs and can come out nearly the same without the time and effort. As someone who invests heavily in Philadelphia, I can also say the price point you are targeting is going to lead you towards neighborhoods where the BBRRR strategy doesn't often lead to realized gains that correlate to the appraised values. Would be happy to discuss this with you offline.
- 2yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @Account Closed:
Apart from the difference in interest rates. I'm looking for some feedback; Between a HELOC or a Hard Money Loan which would be the better option ? My ultimate goal is utilize the BRRRR strategy in acquiring a property in Philly, this would be a out of state venture for me. Ideally I am looking to keep the purchase and renovation cost between $175-200K.
Hey Damion,
This will depend on several factors.
1. Are you doing the rehab yourself or working with a GC?
If you are a first timer, many hard money lenders will require you to work with a GC in order to finance the rehab for you and close on the loan. It can be expensive to work with a GC on light rehab projects, so going with a HELOC may be more beneficial. You also won't have to worry about having funds set aside on top of the downpayment + closing costs to request rehab draws.
2. Do you need a fast close?
HELOC is a no brainer for this one. You won't have to worry about a hard money killing the deal, going through the loan process, and having a longer escrow.
3. Fees
Hard money is much more expensive. Be prepared to pay points and high rates compared to a HELOC.
4. What is your strategy?
If you are looking to scale quickly, combining both may help you do multiple flips/fix and holds since you won't be depleting your HELOC each time you close on a property. You can spread that line of credit across multiple closings.
5. Can you qualify?
HELOCs are much harder to get approved for than a hard money loan. Lenders will want to verify your income, debt, and credit whereas on a Hard Money loan, lenders will qualify you based on the deal itself and your experience.
LuxePrivate Investments LLC 570 Reviews - Specialist · NJ · Member since 2022 · 1k+ posts · 663 votes2y
Why not take a Heloc of like 100k and use that as your bankroll and then use Hard Money to fund 80% - 85% of the deals. Get through a few deals and then pay the HELOC back and use the profits moving forward.
Philly is my backyard, I grew up there.
- 2yAlan AsriantsBusiness MemberReal Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
The financing cost behind hard money are usually more expensive than taking out a HELOC. Your rate is usually cheaper and your closing costs are negligible when taking out a HELOC. When using hard money, your rate is usually higher and you also have to pay some sort of lender fees and points.
Using a HELOC, you'd become the bank and finance, your own transaction for a cheaper amount.
If you have a good exit strategy than a HELOC will always be better in my opinion.
Alan Asriants - New Century Real Estate 592 Reviews
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