LOC doesn't ruin your credit. But it may prevent you from borrowing more due to the increased debt to equity ratio.
It's really simple. You get a loc, use the cash to buy property. The LOC is based on your ability to pay, backed by the asset. So, once you tap it out, you will be limited to borrow more if you need extra cash.
The hard money folks will require that you put up some of your own money. they don't check your credit. What they will lend you will be based on the deal financials and their relationship with you. So, you can tap some of the LOC for the cash you need on your end and the hard money for the rest. Then you'll have the LOC for any potential overruns. Just plan things out so that you aren't extending yourself.
@Shayna Queen I would urge you to be very, very cautious about getting into a flip using hard money and a LOC. Flipping can be a very cash intensive sport, and it is easy as a newbie to go over budget. I did a flip with a fellow investor last year in Berwyn, which is a market I am very active in as a real estate agent and buy and hold investor. Neither of us had flipped before, but we both owned multiple properties and had a lot of good sub contractors we had used. We ended up taking 14 months in total to complete the project instead of 6 months like we projected. We also ran over our $75,000 budget to the tune of $126,000 for rehab!
We used cash to complete our flip, and after 14 months of work GC'ing the project and listing the home for sale as the listing agent, I made a whopping $2,270... If we had used hard money we would have lost thousands.
@Jason D. I am glad you have had good experiences with hard money lenders. Most of the lenders I spoke to early on in my investing career wanted me to have either fairly high liquidity or substantial net worth. I never found much value in them and have done better with traditional bank financing. Like I said earlier, using a hard money loan at 12% interest with several points is a risky endeavor. If the borrower is a seasoned house flipper, this may be an excellent risk to take. I was just sharing my personal experience, and I am glad I haven't need a hard money lender thus far.
@Alicia Yoder thank you for sharing. This makes me hopeful that my creative financing is not a completely bad idea!
@Shayna Queen I regularly advocate HML with an LOC to new borrowers and get them setup with both the large LOC ($150k+) and HML BUT you must be super smart about this. Your strategy is not for the faint hearted and can lead to a painful experience very quickly. Here are some tips:
1. Have secondary exit strategies lined up before taking on any debt, just like @Alicia Yoder advocated. That means if you are flipping, make sure that you use a lender that can also refi the property in a pinch...you have to check on the rental refinance loan terms to make sure your DSCR is manageable for the lender; do the math as if you have already taken out the HML and LOC. Some sophisticated lenders are now using the debt service ratio instead of DSCR after 2008. Look those up before and do the math before getting involved. PS. Some lenders will want to see bank statements showing skin in the game. You will have to properly time out receiving money in your bank with how your LOC lender reports to credit bureaus. Otherwise, you may have money in the bank but too high a DTI for your lender.
2. Make sure the LOC you are receiving is large enough for your future flips. If you are just starting to climb the real estate investment ladder, the tendency is to go after the smaller deals first with hopes of building up confidence and your bankroll for your third or fourth project...so keep that third or fourth project in mind right now and get a larger than needed LOC.
3. Discipline yourself on the rehab. Go after a property that has minimal rehab. That will help you to avoid some of the pitfalls mentioned above. Plus lenders love to see these projects and will be more willing to fund. Here comes the discipline part...these projects are hard to find. Just keep looking and be disciplined. Especially with a large LOC, you will be tempted to go after a project with a large or even normal rehab amount...but stay disciplined.