Refinancing on Hard money brought properties?
Jul 27, 2009
in
Hard Money Loans
I’m looking to invest in real estate through hard money loans and after some research and talking to some advisors in the field I found that you only make profit on these type deals when they are sold since the property is being used as collateral.
I’ve also heard that you can refinance the property brought with hard money, but I didn’t think this was possible since its already being used as collateral with the hard money. Can someone please share their knowledge with profiting from hard money deals. Thanks in advance.
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2 comments
rlloydevans on July 27, 2009 at 11:12 pm
A hard money loan means they are giving you a loan based on what the estimated value of the property will be after renovations, commonly referred to as AFV (After repair Fair Value).
A project I recently looked at was as follows:
Purchase price $59,000
Purchase costs $1,000
Hard Money Loan (6months) $75,000
Estimated repairs: $9,500
AFV: $100,000
So, I’d have bought a duplex for $60,000 (including costs) and received a loan of $75,000, of which 10,000 was available for repairs and another $5,000 for emergencies or in case the costs went over estimates.
At the end, I would refinance with an 80%-30-year fixed rate loan. $75,000 would pay off the hard money. There would be interest charges of $5,622 for the hard money loan (they are expensive!) so this particular transaction would have cost me a $622 cash investment.
In the end I would have had a duplex earning about $1200/month in rent with a mortgage costing $587.01. And equity of $20,000.
Now at first blush, it looks like a sweet deal. I buy a house and renovate it and have litlle money involved. Actually I do. Most hard lenders want to see you have liquid assets in the bank (In this case, $10,000) and a decent credit rating to make this type of loan, so they know you have some money to draw on in case of complications. It IS still a sweet deal, but you still have to have cash in the bank and credit to pull this off.
This is one reason I often work with partners. I don’t tie all of my cash up on all my deals. Many times I have partners with good credit and $20,000 earning interest in the bank. They put up the liquid equity and the borrowing chops when I get stretched thin so I can take care of the other details.
There are "Real Estate Gurus" who talk about taking hard money loans like this and pocketing that extra $5,000. They are idiots. Watch "Flip This House" on TV and see all the things that happen that delay the project (higher interest costs from the hard money loan!) or cost more than the estimates envisioned.
I decided against this particular deal because of the current turmoil in the refinancing market. I want to have a better idea of the terms I’ll have to face in 6-12 months for something like this that I would consider a borderline transaction for me. Last year I would have done it, except instead of keeping it as a rental I would have sold it to cash in on the equity. This year I’m waiting for really super deals, planning to hold them as rentals for 2-5 years when the market turns around..
Hope this helps
G C on July 27, 2009 at 11:12 pm
Sorry, but my idea of "hard money" is all cash. Who’s selling you the mortgages? Quit having lunches with them, since they’re probably buying (to get you into a scam)
The ‘flip’ market is gone in case you haven’t heard, so it’d be stupid to buy anything at this point unless you’re gonna hold and rent, and even that comes back to bite you in the A..