Updated 2 months ago on . Most recent reply
Questions about Hard Money
We saved up for a few years not knowing a lot about the industry. Bought our first rental using conventional financing with 20% down. Renovated the majority our selves. Have a tenant in place, it's cash flowing and doing great.
After doing all of that out of pocket, we are currently saving to do our next deal. After talking to some people, and doing some research, we decided that it would be a great option for us to form an LLC and use hard money loans to flip a few properties and build some capital, then pivot back to brrrr to build up our rental portfolio. We are still in the process of putting this together but just had a few questions.
-looking at small residential single family (2 bed 1 bath etc.) less than 100k purchase price. That being said, what is a realistic number I should have for cash reserve or down payment using HML. Or with that cheap of a property is it common for a HML to fund the whole purchase price and renovation for a newby? I assume they would still want to see a cash reserve, or see some kind of skin in the game on our end?
-the properties we would like to purchase are mainly cosmetic remodels. In this case, how likely would it be for a HML to allow us to drawl funds to do the renovation on our own. We don't have a formal construction background, but are capable of the basic work not involving permits. Just looking to minimize contractor work in order to make the deal better financially.
Any advise or input is appreciated!
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I am posting here as a hard money lender who has also been a landlord since 1978 and a house flipper since 1991 (over 100 flips). None of anyone's responses have contained any misinformation, but I just thought I'd throw a couple of comments in from the lender's side.
1. Develop relationships with hard money lenders as close to you geographically as possible. The further away they are from where you are investing, and the less they know you, your market (and the properties in them down to the neighborhood), the more "underwriting" will take place, and the more they will seem like a bank.
2. The best place to develop these relationships is in your local investor/landlord/REIA. The hard money lenders will be there too, or at least the others will be able to tell you who they are.
3. I tell prospective clients that a hard money lender is not your first stop on your real estate journey. I need to see you've dragged a couple of rehabs successfully across the finish line. And if your project is a rental that you intend to hold onto, I need to see you have experience as a landlord. I may even require that you attend the Landlord 101 classes my local association offers (I am one of the instructors).
4. I walk every property inside and out with the the borrower before I agree to lend. I don't lend on a property I wouldn't want to own.
5. A good hard money lender is typically one who is toward the end of their own career, and they've accumulated money they don't want to invest in more real estate. Potential borrowers are probably not asking for a loan for a type of project the lender hasn't already done multiple times. Sometimes, after the walk-through (during which I ask a lot of questions about their plans for the project), the investor is absolutely sure they do not want to buy the property. Borrowers often call on me for input as they work their way through the project.
6. Finally, if you and the property meet my requirements, I'll lend you 100% of the purchase price and 100% of the rehab costs. I'll give you a chunk of the rehab money at closing so you cover all your closing costs and leave with plenty of money to get started. You get the rest in draws. I don't require a formal scope of work, and I don't care if you or your contractors do the work. When it's time for a draw, I may come and look at your progress. But if I trust you, I'll just have you text me some photos. I don't care if you have a big cash reserve. If you need more money, we will do a loan modification and give you some more. Why? because at that point you are so far through the project that the value has increased significantly, so the loan is still protected by a sweet LTV. I've been doing a few dozen loans per year since 2018, and I've never had to foreclose. Why? Because I know my borrowers and the properties they are investing in.