My Money or Hard Money for BRRRRs?

Question

Hey BP Family, I am curious of your thoughts on using your own cash vs. hard money loans for rehab work?  Pros & Cons?  Thanks, T.K.  PS: I am buying SFRs w/ my own cash.

Kevin Sobilo · Answer

@Tariq K Frantz, from my own personal experience I started by using my own cash.

Rehabbing a house is a "project", and there is a principle of project management that says that you can't entirely control cost, scope, and time. If when rehabbing you come across an issue (change in scope), you will need to increase the cost or time or possibly both!

So, I made a conscious decision to use my own money in part because if there were unexpected issues I could deal with many of them by expanding the timeline and doing a bit more work myself. That way I could still produce the same quality result within the same budget.

This worked for me because the projects I started with were fairly low overall cost and the holding costs (taxes, insurance, etc) were also low so expanding my timeline wasn't costly.

For me this approach allowed me to do some projects and gain a ton of experience with a lower risk because I didn't have to worry about the high cost of money with a hard money loan.

I do hope in the future as I ramp up and increase my deal flow to perhaps use some hard money, but I feel using cash to start was a good choice for my situation.

Derek DeVerna · Answer

@Tariq K Frantz I personally prefer using cash for BRRRR projects. This is not to say that someone just starting out isn't able to get their start with Hard Money.

@Kevin Sobilo is 100% correct in his "project" explanation. There are almost always unforeseen issues that arise when rehabbing a house.

For this reason, one must be extra conservative when calculating the rehab, holding costs, and after repair value of any potential BRRRR property. Especially if those holding costs involve the utilization of hard money.

I would suggest funding your first few deals Cash and possibly moving to Hard Money once you have a strong system in place. However, if using Hard money is the difference between doing a deal and not doing a deal, then I would suggest using a HML to do the deal!!

Whitney Hutten · Answer

@Tariq K Frantz I think it depends on your goals and how much capital you have. I started with all cash, but quickly was stymied as I could only work on 1-2 projects as a time.  Now, I personally use hard / private money and underwrite into my number from the start.  I do this so I can use leverage and scale quicker.  That said, I always make sure I have enough reserves to cover projects.

Frank Wong · Answer

Hi Tariq,

I use my own cash no brainer for me.  I don't have to pay high-interest rate any points, I know 100% I will close and the seller feels much stronger about my offer when they see my bank statements.  I can also be more aggressive on pricing in this ultra-competitive market.  That's an edge you need to get the property.

No, HML and a true Cash buyer are not the same. I deal with these offers all the time and if all else were the same seller takes the real cash offer 100% of the time.

Joel Thompson · Answer

Both have their benefits and draw backs. Of course, if you use your own cash, you aren't paying the interest to a HML. If you want to scale up and work on multiple projects at a time, you might decide to use hard money to make that a possibility.

Developing a good working relationship with a HML will give you a second set of eyes on potential deals. That would be valuable to develop now so that you're not looking for one when a deal comes up that you need a lender for. Building that relationship is adding a new tool to your tool box.

If you have properties that you own free and clear, you may be able to cross-collateralize one to give you a "zero down" HML on a new project. Just another way to keep more cash on hand to fund the next purchase.

I hope this helps a bit! Looking forward to hearing more input on this.

Kevin Sobilo · Answer

@Brian Leigh, no a HML (Hard Money Loan) is actually the opposite of a personal loan. A personal loan is made solely based on you as a borrower. Your credit and ability to repay (income & debt). There is no security for the lender.

With a HML, the lender is most concerned about "the deal". So, they care about the value of the property, what it will be worth after you rehab it (ARV : After Repair Value) and also your ability to complete the deal (what your experience level is). In addition they will have a lien on the property, so they have security and can foreclose if you don't pay.

Tariq K Frantz · Answer

Thank you, Derek.  Very helpful.  For the reasons you stated I am leaning heavily towards using my cash on the first few deals.  Best, TK

Brian Leigh · Answer

Is HML similar to a personal loan? My local credit union has $35k unsecured personal loans or lines of credit. What about that route for the rehab portions?

Joel Thompson · Answer

Sent you a PM. Let's find time to chat, I'll help however I can.

Tariq K Frantz · Answer

Thank you Brian.  I will check on the same with the local credit unions in my market - rates will be better than hard money loans (HML).  Best, TK

My Money or Hard Money for BRRRRs?

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