Rehab Loan with bank vs. BRRRR

Investor · Windham, ME · Member since 2016 · 180 posts · 37 votes

Is it better to purchase a rental with hard money and BRRRRing it or just buying with rehab loan from bank, right out of the gate? You'd think save a lot on hard money costs by just acquiring with bank rehab loan instead. And your not running the risk of being stuck with hard money, because for whatever reason the bank wont fund your deal. Less stress.

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Ryan MurdockPro Member

Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes

Yes, all in it was 18%. I'm sure there are better deals out there in the HML world but probably no real bargains.

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Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y
Do you have the luxury of tying up the property with a bank rehab loan? Often times hard money is necessary to secure the bona fide deals where a quick closing is critical. You're looking at a solid 60 days to close most 203k type loans. It can be quicker with a commercial rehab loan but the terms usually aren't as attractive.
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Michael Cohen
Investor · Towson, MD · Member since 2014 · 472 posts · 257 votes
9y
45 days is more reasonable, but Ryan's point is right on: 203Ks are definitely complex loans that require a lot of work for the homebuyers. If you're looking to snap up a property very quickly, then typically you'll need a hard money loan, but the rates are going to be significantly higher.
I am not going to give examples because I don't have enough hard money experience to guess. I'm sure a few BP posters (@Ryan Murdock?) can give a better idea than me.
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Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y
@Michael Cohen I am working with a buyer right now on a 203k loan. The well known bank actually wanted 67 days.....crazy.
HML loans can be all over the place but you're usually paying 2-4 points upfront and 10-14% interest. Monthly extensions beyond the initial term can be another 1-2 points. I think the last one I looked at it would have cost me somewhere in the neighborhood of $18k to borrow $100k for 6 months.
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Michael Cohen
Investor · Towson, MD · Member since 2014 · 472 posts · 257 votes
9y
18% wow?
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Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y
Yes, all in it was 18%. I'm sure there are better deals out there in the HML world but probably no real bargains.
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Matthew Wright
OP
Investor · Windham, ME · Member since 2016 · 180 posts · 37 votes
9y
Yeah Ive used a local hard money lender, they were 4 points 14% and the expense is significant. That's why Im wondering if it would make sense to go the traditional route to save 10-20k, but i could see closing quick is often times worth the cost, if the deal is right.
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Steven Gesis
Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes
9y
Originally posted by @Matthew Wright:

Is it better to purchase a rental with hard money and BRRRRing it or just buying with rehab loan from bank, right out of the gate? You'd think save a lot on hard money costs by just acquiring with bank rehab loan instead. And your not running the risk of being stuck with hard money, because for whatever reason the bank wont fund your deal. Less stress.
Matthew-
(3) Secrets Everyone Needs to Know about using a 203k Loan - Its Easy!
Next, do you currently own a home in your name with a mortgage, if yes, you cannot use a 203k. If no, you can use a 203k. If yes, you can use a conventional investor renovation loan, 20% down and low market rate. You have options, those options referenced will require a qualified credit score and DTI otherwise you are good to go, read the link, seriously 203k loans they are simple so is the process, its only difficult if you do not follow the instructions.
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Timothy Maloney
Lender · Syracuse, NY · Member since 2016 · 165 posts · 92 votes
9y
@Ryan Murdock 18k to borrow 100k for 6 months @ 14% interest would have been 11 points, not 4. That would be extremely excessive and you should fire your HML.
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y
Originally posted by @Matthew Wright:
Is it better to purchase a rental with hard money and BRRRRing it or just buying with rehab loan from bank, right out of the gate? You'd think save a lot on hard money costs by just acquiring with bank rehab loan instead. And your not running the risk of being stuck with hard money, because for whatever reason the bank wont fund your deal. Less stress.
Time is money, money is time.
If you need to close fast, that fast money is more expensive.
One strategy is to offer the seller two prices:
1. $400k using hard money, closing in two weeks.
2. $475k using 203k, closing in two months.
Make sure it is in writing so the listing agent is obligated to present both options, because...
1. Most sellers will go "hmmm $37,500 per month is more than I make now, I'll take the 203k."
2. Many agents will go "pfft, I want my paycheck now, $75k * 3% * 70% * 60% = $945 = not worth waiting for..." and nudge their clients towards the hard money. If the offer is in writing, generally they are obligated to at least present it, even if they do not like it.
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Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y
Originally posted by @Timothy Maloney:

@Ryan Murdock 18k to borrow 100k for 6 months @ 14% interest would have been 11 points, not 4. That would be extremely excessive and you should fire your HML.
Yes, sorry, I was going off memory which was a mistake. Here's what it really was: Loan Amount : $115,000
Term: 6 months with 2 (one month) extension options at 1% each
Rate: 13%
Fees: 3% Transaction fee to the Lender
$1650 processing fee
$600 Inspections
Amort: Interest Only, Payable Monthly
They also wanted not only the subject property as collateral but also another one I owned free and clear. No thanks. I could have made the deal work but luckily was able to find a more cost effective solution.

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Michael Noto
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
9y
@Matthew Wright The 203k loan program is designed for owner occupant first time home buyers just as a heads up.
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David Clay
Real Estate Investor · Chattahoochee, FL · Member since 2014 · 133 posts · 107 votes
9y
Originally posted by @Ryan Murdock:

Originally posted by @Timothy Maloney:
@Ryan Murdock 18k to borrow 100k for 6 months @ 14% interest would have been 11 points, not 4. That would be extremely excessive and you should fire your HML.
Yes, sorry, I was going off memory which was a mistake. Here's what it really was:
Loan Amount : $115,000
Term: 6 months with 2 (one month) extension options at 1% each
Rate: 13%
Fees: 3% Transaction fee to the Lender
$1650 processing fee
$600 Inspections
Amort: Interest Only, Payable Monthly
They also wanted not only the subject property as collateral but also another one I owned free and clear. No thanks. I could have made the deal work but luckily was able to find a more cost effective solution.

It seems that the upfront cost of the HML was very close to a traditional loan (a couple grand off if using 26% as necessary money for a traditional loan). Add in the other considerations, 1% for extensions and their unreasonable request to put a lien on another unrelated property, and this is unreasonable.
I have been looking at HML's for some things and I can't seem to get the numbers to work out sufficiently enough for it to make sense. I suppose if I eventually find an excellent deal where I would be able to refi out and get most of my cash, if not all, back in hand I could consider it. I haven't been so lucky yet in my efforts.
Thanks for sharing the information.
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Account Closed
Lender · Stuart, FL · Member since 2017 · 112 posts · 37 votes
9y
Some are warning about the owner occupied FHA route however if that is the problem there is still the HomeStyle Renovation option. Up to 50% ARV in repairs 85% LTV for investor SFR (multi only with owner occupied).
However no sweat equity can be pulled out through either product. But you do get a lower LTV than an investor cash out refi.
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Jim BlackburnBusiness Member
Lender · Florida Based (48 states Puerto Rico) · Member since 2017 · 321 posts · 121 votes
9y
Matthew Wright Typically a renovation loan will be a little under1 % higher than a non-renovation ion loan. (3.75 vs 4.75). We're talking about Fannie Mae Homestyle Renovation Loan which can be used for primary resident or investment property, or Fha 203k Renovation Loan which can only be used for primary residence. Once you get up in the double digit cost of money, you are either talking new construction rates, normally paid as interest only over 1: month period, or you hard money. Ask anything.
954-993-1625
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Jim BlackburnBusiness Member
Lender · Florida Based (48 states Puerto Rico) · Member since 2017 · 321 posts · 121 votes
9y
Correction to last post. I was typing too fast on my phone. I meant to say construction loan interest is normally paid over 12 months or until the project is complete and the loan is paid off.
954-993-1625
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Matthew Wright
OP
Investor · Windham, ME · Member since 2016 · 180 posts · 37 votes
9y
@Jim Blackburn How about commercial loans with rehab tied in? You have any experience with those?
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Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y
@Matthew Wright I've done those recently. The bank I'm working with now will give 80% of "as-completed" value. Fixed rate for 5 years then adjustable.
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Matthew Wright
OP
Investor · Windham, ME · Member since 2016 · 180 posts · 37 votes
9y
@Ryan Murdock Any luck with 20 year amortization (or better)? I've heard good things about Machias Savings Bank
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Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y
@Matthew Wright MSB was the "go to" lender for this type of stuff but I think they've taken some big hits in the past few years so they've tightened their requirements a bit. First National is where I'm having the most success right now but I don't believe they have any branches south of Rockland.
And yes, 10/15/20/25 yr amorts on those commercial rehab loans.
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Gay Lloyd
Real Estate Investor · Ogden, UT · Member since 2014 · 160 posts · 81 votes
9y
It many times boils down to the cost of opportunity. Get the money quickly or lose the deal.
You need to be realistic, conservative, and confident in how you have run the numbers to be able to refinance or sell quickly when the project is complete.
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Danielle Hammond
Marquette, MI · Member since 2015 · 93 posts · 12 votes
9y
203K is for first time home buyers, and you have to occupy the home for 2 years, (From what my lender told me, not sure if I can refinance sooner to get out before than or not, but I don't need to).
That being said, I did use a 203k loan to get into my first home/investment. Being new to Real Estate I wanted to learn more about the process- my loan took 100 days to close, yes 100 days- BUT that was because I had a BAD lender, had to fire a contractor at one point and start over, and appraisers were booked way out in my area. Other than that the loan itself is GREAT... But try to work with a Local bank if you go this route, there is a lot involved. We didn't have any local lenders that offered it and I used one out of Florida for a deal in Michigan- It wasn't a good mix. Nine months later, my contractor still has not been paid 50% for his labor.
Whether you do a Bank OR HML - I think it is WHO you are working with, not what their title is. Is it time sensitive? If time is of the essence, then spend more on the HML and get it done. If time is NOT as important, go to a bank and save money. Right?
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Nick G.
Investor · Moorpark, CA · Member since 2016 · 248 posts · 191 votes
9y
Just jumping in here to amicably adjust some common misconceptions - FHA loans, including 203k's, are not first-time buyer loans. FHA stands for Federal Housing Administration, it has nothing to do with first-timers, it was a program created in the 30's to help people avoid defaulting after the Great Depression, and later to help soldiers returning from war. That said, it's often the loan of choice for first-timers nowadays, and it's a cool loan at that.
It is also completely possible to get an FHA loan even if you already have an existing conventional loan.
Furthermore, it's actually possible to have more than one FHA loan under your name - however, it's only under extremely specific conditions, especially in the past two years or so, as the program is intended to be one-at-a-time.
Hope that helps anyone curious about FHA specifically.
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Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
9y
It basically comes down to what the ARV or after repair value of the deal will be because if you're not adding much value (IE your total "all in cost," (acquisiton + rehab) will not be at 80% or less LTV after you complete your rehab) then you should probably do a rehab bank loan like a 203k or a fannie mae home style (conventional variant of rehab home loans).
The reason you do a HML (hard money loan) and then do a refinance out is because you needed the HML to capture equity or potential equity (IE a smokin deal!) and you want to fix it up then refinance your money out of it to do another deal.
Ideally if you do your numbers right and your ARV correctly you'll end up with all of your original down payment and rehab money back + then some for the next deal.
So in summary, if your ARV is not good enough to make your original cost + rehab at 75-80% or less LTV (loan to value) then you should probably just go the retail route with 203k/home style fannie mae loan.
Now, if you can buy a great deal and use 203k or Home style as a refinance rehab option then that'd be a sweet strategy/hybrid play.
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Danielle Hammond
Marquette, MI · Member since 2015 · 93 posts · 12 votes
9y
When I applied for my 203k loan, the lender I went through told me I had to be a first time home buyer. One of my clients (I am a Realtor®) is using a Fannie Mae loan and their lender told them they had to be a first time home buyer as well. I asked him to clarify on this for me, and he stated that, "you must not have purchased a home in the past 3 years to be considered a 'first time buyer'".- So technically? At the same time, I have clients who used a VA loan to purchase an owner-occupied duplex and are now using a VA loan to purchase a single family home while keeping the loan on the 'now investment' property- duplex. SO- I really do think it depends on the specific loan and the lender you go through. Find a good lender that is willing to work with you and can get creative!!! lol.
Another thing to keep in mind about the 203k is that the work must be done through a contractor. So if you are hoping to save money by doing all the work yourself with your handyman pals- it may not be an option. If you have a good, reliable licensed contractor- it is a wonderful option!
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Bill Rich
Lender · Marlton, NJ · Member since 2016 · 126 posts · 44 votes
9y
Originally posted by @Steven Gesis:

Originally posted by @Matthew Wright:
Is it better to purchase a rental with hard money and BRRRRing it or just buying with rehab loan from bank, right out of the gate? You'd think save a lot on hard money costs by just acquiring with bank rehab loan instead. And your not running the risk of being stuck with hard money, because for whatever reason the bank wont fund your deal. Less stress.
Matthew-
(3) Secrets Everyone Needs to Know about using a 203k Loan - Its Easy!
Next, do you currently own a home in your name with a mortgage, if yes, you cannot use a 203k. If no, you can use a 203k. If yes, you can use a conventional investor renovation loan, 20% down and low market rate. You have options, those options referenced will require a qualified credit score and DTI otherwise you are good to go, read the link, seriously 203k loans they are simple so is the process, its only difficult if you do not follow the instructions.
@Steven Gesis - just an FYI what you posted above is not correct. You can 100% own another home and do a 203K. I have done many 203Ks in this scenario.
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