Hard Money for BRRRR - downsides?

Question

Hello BP. I'm in the process of structuring my first BRRRR and had a question about using hard money. Would HML's be typically willing to finance ONLY the rehab portion of the project (i.e., I buy the property for cash but use a HML just to rehab it)? If so, are there any major downsides to doing this? Would the following be examples of typical downsides to this strategy:

- rehab amount falls below minimum loan requirement

- not being able to refinance / use deferred refi since I'm using a loan for the rehab vs. cash

- ARV appraises less than expected, and hence presents a challenge in repaying the HML solely through a cash-out refi

- extended holding costs through being unable to refinance until the required seasoning time period ends (e.g., 6 months, 1 year)

Just trying to get an idea about what obstacles I should anticipate if using this strategy. Thanks you.

Ishviyan D. · Answer

Thank you for your response @Ryan Dossey. Account ClosedI'll send the details over to you

Ishviyan D. · Answer

@John ThedfordThank you. Yes I agree. When I ran my numbers, it would take 17 months of my property's cash flow ($350 p/m) to pay off the HML ($6k). The only scenario I see it being worthwhile pursuing such a trade-off is if the cash-out refi of the property returns more than 100% of the invested cash. Otherwise the investing strategy just going to be a money pit for a long time.

Ryan Dossey · Answer

HML's will potentially fund both but they're going to want you to have some skin in the game or some serious equity.

You're going to need multiple exit options to get this funded. Can it be sold to an end buyer as a home? To a less sophisticated investor as an investment? Can you move into it as a primary?

Hoping you're going to be able to do a cash out refi when you're paying 12% interest and have an 11 month term sounds like a recipe for sleepless nights.

John Thedford · Answer

Generally HML is too expensive. I would not enter into any HM loan unless I was positive I could refi out within a few months. Now, if you intend to flip rather than buy and hold HML can be a great benefit as long as you know the numbers!