Specialist · Miami, FL · Member since 2020 · 14 posts · 4 votes
Hi BP,
Was brainstorming on how to go about purchasing my first property and stumbled upon a nice duplex recently fully rehabbed and both units rented out going for lets say 100k list price.
So my question is, if I use a hard money lender just for the purchase of the property and turn around and refinance it with a local bank for 70% LTV, are there any foreseeable pitfalls doing something like this. Assuming the ARV is high enough to pay back the hard money lender.
I'm confused. It doesn't need any work why would you get a hard money lender instead of just getting a conventional loan from the get go? The ARV would just be equal to the purchase price.
If you bought it at a discount, let's say it's worth 130,000 and you bought it for 100,000 you could refinance it in 6 months and essentially get around the 20% down payment. It's kind of a BRRRR without the rehab. The HML might not finance 100% so you would still need a deposit. I have done this a couple of times. Bought it at a discount with 100% private money and refinanced it in 6-12 months.
@Guillermo Triana, I've done that before and I plan to do it currently on 2 properties I just got under contract. Three potential pitfalls to look out for:
1. Some lenders will only allow financing for 70-75% LTV based on purchase price + rehab costs. This becomes a problem if your rehab costs are minimal. Make sure you find a lender(s) that offer 70-75% LTV based on a 3rd party appraisal.
2. You want to make sure you refinance out of the hard money as quickly as possible. It's more expensive than a conventional loan. I've also seen interest rates increase based on how long you hold the hard money for. For example, months 0-9 the rate is 10%, but months 9-12 the rate is 12% and months 12+ the rate is 12%.
3. Lenders have different "seasoning" guidelines. The standard seasoning period is 6 months, but some lenders require 9-12 months and others don't require any seasoning. Do your homework here and reach out to as many local lenders as possible.
@Odie Ayaga Two reasons to do this approach: 1) You can make an all cash offer, instead of contingent on financing. Cash is always a preferred offer for a seller. 2) If you buy the property under market value and then refinance based on its true ARV, you have less cash in the deal. If you go the conventional approach your 20-25% down payment is in the deal. If you refinance with a higher ARV than the purchase price you can pull out cash and you may have somewhere between 0-20% cash left in the deal.
@Jon Kelly @Kenneth Garrett thanks for the insights. I was curious and you guys confirmed my thoughts. As long as 1) I can get the property at a good enough discount and 2) the ARV is high enough, I can essentially skip the rehab and rent portion of BRRRR. Yes seasoning period is definitely something to look out for.
@Guillermo Triana I think your thinking is inline to skip the rehab loan. My threshold is if the rehab is less than $10K and the property can qualify for a conventional loan, I'll put a conventional loan on it immediately and look to refi at year 2 if possible. I do this because there is also a drag created (ie. closing costs, second appraisal, unknown with the getting the property to appraise at the higher ARV) when you do a refi. Bonus... you get to lock in a super low rate now!
@Jon Kelly and @Guillermo Triana thanks for your response Jon. I know many sellers might not, but as a seller I wouldn't accept hard money as "cash". I hear this a lot and I'm not sure where it started, but as far as I know you can ALWAYS waive your financing contingency, but you still need to qualify for hard money so I'd be careful about that. I know I've heard of banks as sellers that kill deals because the buyer said cash then it turned out they were using hard money even when the lender was ready to pay.
I can see what you're trying to do Guillermo, but keep in mind you'll have to have your numbers pretty tight as well as your lenders because there can be unexpected pitfalls (some appraisers may be leery of appraising it at your expected ARV if nothing has been done to the property since you bought it). You'll also need to account for two sets of closing costs and fees and the associated monthly payments. Can it be done? Sure, but it sounds like looking for a 5%er deal versus the 95% that are out there.
Question for you Joe: Was the deal made in the cases you've used this by the fact that it was a rental and you might take a loss up front to get your money out, but you recoup in time on cash flow?