Creative Loan for Rental Property

9 Replies

Newbie question.

So I have a family friend who is selling off about 5 of his rentals. I am going to get an FHA loan for my primary residence. But, I want to take this opportunity to buy at least 2 more. My question is, if I could get qualified for 2 more loans as for an investment property, could I use a hard money lender for the 20% down payment on each of the properties?

Say they were $100,000 each

HML = $40,000

$20,000 for unit 1

$20,000 for unit 2

Finance through conventional loan unit 1 $80,000

Finance through conventional loan unit 2 $80,000

I know the deal will be good enough to give me a significant cash flow, but how would I be able to use a hard money lender for this? Could I get the loan at 8% (just estimating the number) and pay the lender 8% each month of the rent and then when property sells, pay him his money back? 

I just want to know what the best way to go about this is.

I think with a conventional loan you are required to live in the house (part of the gig since you’re getting such a low interest rate), so if you’re not planning on moving in, that may not work. If it’s purely investment you’ll have to do some sort of other loan.

@Tyler Wetherbee Will this family friend provide seller financing? Much better to go that route than get a HML, in my opinion. Your family friend knows the assets, can help you learn, and might give you a break as long as it makes sense. Maybe he can carry paper for 2-5 years, then you refinance and cash him out.

I'd be very careful about using too much leverage via hard money loans. When things go well you could be ok but things can go bad very quickly for you when you have unexpected vacancies and repairs at the same time. Do you have enough financial reserves to withstand those kind of scenarios?

@Andreas Mirza

That’s not a bad idea. I could probably ask about doing seller financing. The reason why I was thinking hard money is cause I can still afford it. The rentals give me about 300 cash flow after paying for expenses and an 8% deduction for hard money 

You most likely won't be able to get financing of 100% from two separate lenders because neither one will want to be in the secondary position. The conventional lender certainly won't lend on the property if your down payment is sourced from another loan. 

Also, what's your exit strategy? if there's no real exit play and the houses don't increase in value by at LEAST 10 or 15% you won't be able to pay off the loans, or you will eat all the cash flow up paying closing costs.

I think this is not a good idea. What you can do is ask the owner to carry 25% of the purchase price as a secondary mortgage then you can ask a bank to loan 75% of the value against the property. This puts all the risk on your family friend so they may ask you to come to the table with 10% in case the property decreases in value YOU'RE the one who eats it and not them.

Additionally I don't think you'll be able to find decent hard money at 8% without paying it down up front and in that case you might as well just ask your family friend to carry it and pay him the money to do so.

On a conventional loan, the down payment cannot be borrowed. You can get a gift from a relative but that requires an explanation letter stating it is not required to be paid back. So hard money would not work for what you are trying to do. (At least not with any lender that sells their loans)

Yeah if your family friend isn't looking to 1031 the properties into something larger there's a big tax advantage for him not divesting completely and just financing them to you at 7% for 5 years with a 30 year am. Everyone's happy.