Good morning BP! I have a few questions concerning hard money loans and a few other financial questions.
So I'm interested in purchasing a multi family in Elizabeth New Jersey (Union County) and after going to multiple loan officers/ mortgage brokers I'm only able to borrow $235-250k. My think is okay after I borrow that money (FHA) then I'm pretty much stuck for 2 years until I can borrow more money and I don't want that!! Is there anything that I could do to keep purchasing properties if I do go FHA? FYI this would be my first property.
Then I came across BP market place and I found amazing deals on there. I've reached out to a few people who've posted them, but yet to hear back. But either way they'll most likely want cash. And that's my one thing, I don't have $100k cash. So would it make sense to get a hard money loan and pay 12% in interest on a $100k loan with the ARV of $250k with $50-75k in repairs? How would I then refi to a lower interest rate? Or would I have to pay it all off within the terms? Also would a hard money loan loan me repair costs? Maybe I need to learn a little more about hard money loans.. Any guidance or references? Thank you!!
Sorry for any typos.
As it pertains to the hard money side of things I can help you out a little here. First of all, realize that hard money is going to include points on top of that 12% so take that into consideration. Furthermore, the hard money loan would most certainly build in the construction costs to the loan so you will be paying points and interest on the total loan amount and thus have more carrying costs. Many people use hard money to do just what you are describing but you need to make sure you can refi out of the hard money loan. Most traditional lenders will require a seasoning period of 6 months so expect to hold the hard money loan for at least that long.
A few more things to think about are as follows. Most lenders will require the property to be purchased an held in some type of entity. Find out how this will effect your refi plans. Most lenders will require the property to be delivered vacant, especially during the constructions phase. Are there tenants currently in place? If so, are you going to remove them prior to closing or will they be staying put? Are both lenders aware of this? Find out. Lastly, and here is the catch 22, many hard money lenders do not allow occupancy during the course of the loan which makes the seasoning process hard for the back end loan. You will need to explain the details of the deal to all lenders involved so that the appropriate measures are in place.
Your plan is logical and makes sense it just takes a little more planning on your end. As long as the hard money lender is confident their loan will be paid back you shouldn't have any issues.
@Carlos Rodrigues Agree with @Andrew Michael , all of his points on HML are valid. I think it will come down to whether or not you're occupying it. You mentioned FHA, which is owner-occupied, and HML, which generally is not.
Both strategies are good. If you're owner occupying, FHA = low down payment. I'm not sure why you said you can't borrow more money within 2 years. I believe as soon as you meet the LTV guidelines you can refinance out of FHA. I've seen some people do it in 6 months (the property values rose and she was paying a lot extra toward her monthly payment too).
With HML you certainly can make a good profit if you manage the project and address the exit plan properly. Keep in mind there even if you get purchase + rehab financing, they're probably going to want a good percentage down (25% ?) and cash reserves to finish the project if there are cost overruns.
Hope that helps and good luck!
You are correct in your thinking with the BRRRR strategy. Its important to make some distinctions here. As a lender see's it, its all about risk. So in response to the original poster who said he did not have much cash to put down I was bringing the issue of occupancy (higher risk) to his attention. In a situation such as his, we would not want to give him a standard "purchase and flip" loan. It is likely due to the additional risk we would carry the loan at a higher interest rate, lower LTV ratio, or want more points down. Either that or leverage with some sort of cross collateral agreement.
The BRRRR strategy can certainly be pulled off I was just explaining to him what lenders may be looking for and thinking. The best thing is to be upfront with your lender so they can adjust accordingly. Again some lenders do not take issue with occupancy but some do. Just make sure all parties involved are on the same page.
@Carlos Rodrigues agree with both @Tom S. and @Andrew Michael regarding HML. The important distinction regarding the occupancy is whether or not the property is OWNER occupied. Most if not all HMLs will not lend on owner occupied properties. You can certainly use HML for the BRRRR strategy, but you can't occupy the property yourself.
Hopefully this helps. Let us know if you have any other questions.
Sorry for the late response everyone! But thank you so much for your guidance. Yes I would not be occupying the unit/s. I just don't what to not be able to purchase another property after I do a FHA. But it seems like I'm able without waiting a year or more. Maybe what I could do is use FHA as my first deal to take advantage of the 3.5% down and then months later do a HML. I just need to read up more on it so I can have a better understanding, so I can have multiple exit strategies. And I've heard of the BRRRR strategy but I haven't realized it was done with HML. I'll definitely be looking into it. Does anyone know of any HML Lenders in Union County NJ?
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