What are some advantages and disadvantages of using a HML?
Also why would some who has been pre qual'd to receive a conventional loan choose the HML instead?
I know it may be vague but just trying to wrap my head around everything, thanks!
The short story is that you generally would use an HML when you need to close fast or can't qualify for a conventional loan because the rates for an HML are going to be higher.
@Randolph Brown disadvantages of HML also include the period in which you have to pay it back (usually one year to 18 months) as the name suggests it's expensive. People use it to close quickly and they can finance the rehab costs. It's just the cost of doing business
The BRRRR method philosophically means you are buying distressed properties at a discount. Many times conventional financing is not possible as the buildings are not habitable. This is where HML and private lenders are a good option. Private lenders in my mind have better terms. They are more negotiable for 6 months plus or minus loans.
@Odie Ayaga thanks a lot for you insight!
@Kenneth Garrett when working with a HML is it true they require months of reserves? Also the most they will do is about 70-75% LTV?
The LTV and reserves are based on the individual lender. I've seen 65% LTV and 3 month reserve. It varies quite a bit. I've been able to secure private loans at 100%. keep your options open.
@Randolph Brown HML is expensive
@Kenneth Garrett thanks for the info!
@Michael Ablan figured as much. Thanks
@Randolph Brown I don't think reserves are that common unless there are extenuating circumstances (for instance, one lender I worked with required reserves with a very low credit score). I've seen (and used) LTVs up to 100%
HML is expensive but people use it when conventional and other means of financing are not available. In the case of BRRR, you will generally buy distress property and the bank will not give you a loan on that property. So you use personal lender or HML to buy that property. Once you fix your property you do a refinance loan and payback HML.
@KrunalPatel in reference to the refi, what does it mean to"not leave money in the deal". I understand the preventive measure is in the buying stage. Just don't really understand the term.
Leaving money in the deal is referencing the fact; you had to put your cash in the deal and when you refinanced you were not able to pull it all out. If you put in $20,000 of your money and when refinanced you only got $10,000 back you have $10,000 stuck in. Its not the end of the world if you had money stuck in. If the property cash flowed $400 per month. In theory you would get all of your money back in 25 months.
@Kenneth Garrett makes perfect sense! Ideally goal is to get your money out and then some? But pulling out too much on the refi can cause you cash flow to take a hit?
@Randolph Brown it might lower the cashflow because of high mortgage but you will have have extra cash to invest in other property.
It’s more like having a one property that cashflows $400 a month vs having 2 properties that cashflows around $250 each per month.