BRRRR- is there a reason to choose hard money first over bank?

6 Replies

I've noticed that investors tend to use a hard money loan for the first loan for their Brrrr and then get a bank loan?... Is there an advantage to this method?

I have a triplex I have owned for 2.5 years now. It needs major work but all units are rented and it cash flows. I invested about 200k in the purchase of this property, as California is insanely expensive. I want to Brrrr the property, as the ASV, is about 300-400k more than I purchased it for now, and rents would go up significantly. If I just refinance I can pulled the money invested, 80% as bank allows, but the prop still needs about 100k in work.

What is the benefit of going with a hard loan and then a regular lender?

@G. Doby

In your case, since you've owned it for 2.5 years and have equity you could get a HELOC to do the rehab and then refinance. That would be cheaper than hard money. Hard money works best for properties that are in such poor condition that they can't be conventionally financed, or for a borrower who has no other source of funds. That doesn't seem to be the case here.

I agree with Nate that you don't need to use a HML given your scenario.

To answer your question the main reasons people who BRRRR use HML's instead of bank loans is:

1) Most of the time the properties need too much work so it doesn't qualify for conventional lending.

2) They want to avoid having to pay closing costs twice on the purchase loan and on the refinance loan.

Another reason is if you find a property that you need to close on quickly and don't have the time to wait for a traditional loan to go through the underwriting and approval process.

This is common in situations like buying from a wholesaler, distressed owner or a competitive market where a "cash" offer can help you win the deal over someone using financing.

@G. Doby  

@G. Doby , as Brian mentions, there are several reasons to go with a HML. In your case, a HELOC would be a great option. If you are running into issues with that, a construction or rehab loan would be a good alternative. Both will likely be dramatically cheaper than a HML. If it were me, a HELOC would be more favorable than the construction loan, but with a HELOC they will appraise in current condition not ARV, so there could be an issue there. The construction/rehab loan will look at ARV, which seems to be where a lot of your value is, but it will take out your existing mortgage, replace with the construction loan, and you would then need to refi again back into a permanent loan, as construction loans are typically 12 month terms.