Hard Money for Buy and Hold Rental Properties

8 Replies

Hi BiggerPockets Community,

I am a new Investor and I just had a quick questions about using hard money to purchase a buy and hold rental property. I plan to Buy, Rehab, Refinance, Rent, and Repeat (BRRRR) by using hard money. Can anyone explain how to refinance on a hard money loan if the property was purchased through an LLC.

Property Details (Purchase price: 115k, Rehab 20k, ARV 180K)

Do banks refinance to LLCs?

Can anyone walk me through or give me steps on how I can go about refinancing?

What are some exit strategies if I am not able refinance? (I would still like to hold on to the property)

I have been looking at doing just that and I am happy to share what I have found:

  1. It is very possible, and can be very profitable to use HML with high leverage.
  2. Call as many different lenders in your area and nationwide lenders and get a feel for who will finance into a LLC and what their seasoning period is.
  3. Decide if this is an investment, or a business. If this is a business, don't let the high cost of a HML scare you, especially if you can get 90-100% financing for the deal. If your goal is to refinance as quickly as possible you will be able to buy more properties and have a higher cash flow with the higher leverage.

I have an HML that will lend 90% LTC, then refinance immediately at 80% LTC or 70% LTV after a year for 10,15,or 30 years. No loan floor. What that does for me is as follows:

Assume I have 50K cash to start with, also assume each property I buy for 45K and plan to put $5K into it to make it rent ready. Assume I want to leave 10K in cash for reserves, in year 1 I can purchase 5-7 properties and begin to rent them out. Lets also assume the ARV on each of these homes is 80K. After a 12 mos seasoning, I can refinance each of my 5-7 properties at 70% ARV. That will pull $56K out of each property, $6K (as much as 42K) in cash for each property comes to me. At the end of year two I can have 10-15 properties cashflowing.

Looking at traditional commercial loans (what you need to close in an LLC) they require 25% down at least and at most will only go 15 year notes at this low of a loan. So lets take the same assumptions (50K in cash to start, homes for 45K with 5K repairs, 10K in reserve), I can only buy 3 houses. At the end of year 1 I refinance each of my 3 properties pulling 55K in cash out of my 3 properties. But at the end of year 2 I only have at most 6 properties cash flowing, instead of 10-15.

So its a longer road with HML and more up front cost but play this scenario out (I have with some spread sheets) over 5-10 years and you be amazed what that leverage does for you.

@Karim Conway the answer to your question is yes, banks will lend to an LLC but they will do it with a "portfolio" loan. A portfolio loan is a non-conventional loan. Conventional loans are governed by Fannie Mae and Freddie Mac (if you recognize those names). Conventional loans have the best rates, the best terms, but they do not lend to LLCs. Portfolio loans are loans that are governed by the bank itself. Meaning it is the banks own portfolio'd money. The will lend to an LLC. However, portfolio loans may have a higher rate, or the rate will be adjustable, or the loan may have a prepayment penalty, or all of those things or more. But it is possible through an LLC.

However, what most investors do is that they borrower a conventional loan, have the property in their name, and then switch it to the LLC after closing. That way they get the benefits of the conventional loan. Just another strategy to think of.

@Christopher Blanco the "Due on Sale" clause is important to know about.  And just so others know what we are talking about here, the Fannie/Freddie note states (I'll summarize a little here):

"if any part of the property is sold or transferred the lender may require immediate payment.  If the lender exercises this option, lender shall provide a period of not less than 30 days from the date of their notice. This option shall not be exercised by lender if such exercise is prohibited by applicable law."

This clause basically states that if you transfer title the bank could require you to refinance the loan.  However, this clause has not been paid attention to since the housing crisis.  Could you imagine if Fannie/Freddie started calling thousands and thousands of notes due again?  This is a strategy that many investors use.  It is important to know about but if you pay on time the bank is making a ton of money on the interest of your loan.  This just hasn't been an issue for many years.

Also, to address the mortgage fraud part of your question, mortgage fraud is very serious.  So if you were to lie on your application, by stating you aren't who you say you are, or inflating your income to qualify for the loan, or using someone else's social security number, that is a SERIOUS violation.  Once you close on your loan, even if you were to switch the deed, you are still personally liable for the note.  Your mortgage is still in place and you qualified for it.  The title/deed is ownership of the home.  In theory, I could be on the deed and you could be on the mortgage.  Don't do mortgage fraud.  Very bad.

@Andrew Postell that's interesting because that is not what my mortgage bank told me on my personal residence. My personal residence's deed and mortgage is in my wife's name. She wants to put me on the deed, the mortgage company will ONLY consider that if the she is also on the deed. They said  her name had to be on the deed if its on the mortgage. 

Sorry @Karim Conway for hijacking your thread.,

@Christopher Blanco what you are describing might be a lender "overlay" or it might be a state specific law.  Lender's are allowed to put extra rules on top of the Fannie/Freddie guidelines if they want to.  So if the conventional rule says "credit score of 660 required" the bank can say "we require 680".  So it might be that type of a rule.  But I don't lend in Ohio, so I'm not familiar with their state specific laws.  It could be a state specific law too. In Texas, if you are married you HAVE to be on title of your personal residence.  It's not even a choice.  Even if you owned the property before marriage, the minute you are married, it's a shared property now.  We are a community property state.  It might be worth talking to title company to see what they say.  They will 100% know the laws about putting someone else on title. Hope this helps.

Originally posted by @Christopher Blanco :

I have been looking at doing just that and I am happy to share what I have found:

  1. It is very possible, and can be very profitable to use HML with high leverage.
  2. Call as many different lenders in your area and nationwide lenders and get a feel for who will finance into a LLC and what their seasoning period is.
  3. Decide if this is an investment, or a business. If this is a business, don't let the high cost of a HML scare you, especially if you can get 90-100% financing for the deal. If your goal is to refinance as quickly as possible you will be able to buy more properties and have a higher cash flow with the higher leverage.

I have an HML that will lend 90% LTC, then refinance immediately at 80% LTC or 70% LTV after a year for 10,15,or 30 years. No loan floor. What that does for me is as follows:

Assume I have 50K cash to start with, also assume each property I buy for 45K and plan to put $5K into it to make it rent ready. Assume I want to leave 10K in cash for reserves, in year 1 I can purchase 5-7 properties and begin to rent them out. Lets also assume the ARV on each of these homes is 80K. After a 12 mos seasoning, I can refinance each of my 5-7 properties at 70% ARV. That will pull $56K out of each property, $6K (as much as 42K) in cash for each property comes to me. At the end of year two I can have 10-15 properties cashflowing.

Looking at traditional commercial loans (what you need to close in an LLC) they require 25% down at least and at most will only go 15 year notes at this low of a loan. So lets take the same assumptions (50K in cash to start, homes for 45K with 5K repairs, 10K in reserve), I can only buy 3 houses. At the end of year 1 I refinance each of my 3 properties pulling 55K in cash out of my 3 properties. But at the end of year 2 I only have at most 6 properties cash flowing, instead of 10-15.

So its a longer road with HML and more up front cost but play this scenario out (I have with some spread sheets) over 5-10 years and you be amazed what that leverage does for you.

I know this is old. Christopher, Do you mind sharing the lender that you use via DM? 

 

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