Hard money clarity

[Account Closed]

Hey guys, so I'm very much green at RI and am still in he education/book reading process. I am almost done with "The Book on Flipping houses" and have two more books lined up after this on, found here on BP. I am going to be getting into flipping but have relatively little money to start and so I was interested in hard money loans, but still have yet to fin a couple specific answers to some questions I have. If any lenders could help me clarify that would be great. 1) I understand HM loans typically come with 10%-18% interest rates but what number is that based on? Total amount? So for instance a HM loan of 350k would tack on an additional 50k in interest? 2) if the lender also covers rehab cost, let's say 50k of rehab to a 350k purchase price would the additional interest be based on just the purchase price or both figures? Thanks to all who take the time to read my long lost!

[Percy N.]

Jonathan Dougherty , different lenders have different programs, but in general you will pay 2-4 points (2-4% upfront at closing) and a 10-14% interest rate for the entire amount borrowed.

Construction financing is typically done via draws based on progress made.

The goal should be to pay the HM loan off as soon as possible- ideally 4-6 months.

[Tina Glover]

Jonathan - since you are in So Cal (as am I) you may want to check out Lending Home.  They are the only HM lender I have found so far that will lend to newbies like me and you.   Their rates range from 7-14% plus 2.5 points.   They will only finance 70% of the present/before rehab value of the home, and won't exceed 90% of the purchase price so you will have to have 10% down at least.  They determine the present and after repair value through a broker's price opinion, for which they charge $299.  If you find a house with a pretty good spread (very possible in Southern California if you find a good deal), it's doable.  And the goal is to only hold the loan for 3-4 months, resulting in a lot less interest than what you would pay if you held it for a year.  $350,000 x .14/3 = $16,333 that you would pay in interest if you held the property 4 months + another $8,750 for points.   I know, it's painful, but there are a lot  more expensive hard money lenders out there and at least you get your foot in the door.  I haven't actually used them yet - still trying to lock down my first flip (San Diego is VERY competitive), but they will be the first call I make when I get to that point (hopefully very soon).  Good luck!!

[Jon Holdman]

Hard money lenders are all over the map in terms of details of their loans. Here's an example with your numbers, a guess about ARV and terms typical around here. My understanding is that you should be able to find a lower rate in CA, but terms may be tougher.

So, say your lender will go up to 70% of ARV, will lend for both purchase and rehab, charges 4 points and 15%, and wants monthly payments.

Lets first do use your number for a good fix and flip. So, I'll assume that your purchase ($350K) and rehab costs ($50K) are 70% of ARV. That makes ARV $571K. That is, you would want to a solid ARV at $571K or higher to do this deal. Based on the $571K ARV, this lender will make a $400K loan. They will take the four points ($16K) off of that, so you'll actually get $384K. Many will hold back the repair money until they inspect the completed work. So, at closing $334K would go to the seller. You would bring the remaining $16K for the purchase plus your purchase closing costs. You will be making monthly payments of 15%/12*$400K = $5000. You will also need cash to pay for material and labor to complete work, then get "draws" from your rehab budget from the lender. My rule of thumb for a deal like this is that you need 15% of ARV of your own cash to complete this deal. With these numbers, you should net about $74K pre-tax profit.

Now, that's a really good deal. Lets say your ARV isn't that good and this is a 75% deal. That makes ARV $533. Your lender will give you $373K, less four points and the rehab budget leaves you with $308K at closing. You would need to bring $42K for the seller plus your costs. And you will have monthly payments and you will need cash for the rehab work. With these numbers, your profit should be about $46K.

Realize that with my profit estimates I'm assuming you hold for six months or less (closing to closing) and you hit both your rehab budget and the sales price.  Often at least one of those assumptions is not met.

That's just one scenario.  Again, lender's vary widely.  Some will let you have a slice of the rehab  money up front, thought that's more likely with experience than as a newbie.  Some don't require monthly payments.  Rates and points will vary.  Those are more a matter of the local market than you.

[Peter Mckernan]

Hello @Account Closed

Welcome to the site! There are many different lenders out there that provide hard money and different rates and terms. For example, there is a company in the Inland Empire that offers 8% for 105 days upfront. The company asks for 80% of ARV. Also, after 105 days the price increases to .089% each day after that. They do not charge junk fees and no points. After six months they will start foreclosure if it has not been sold.

This is just one example of a company, but the company can change those charges any way they see fit for their business model. You will be paying what the company asks of you. If there are no fees, you will be making it up in the interest rate, or the upfront costs.

Good luck! 

[Tina Glover]

Thanks Peter Mckernan and Joe Gigliello for your input!  I would love it if you guys could private message me as I may be about to do my first rehab and am vetting hard money lenders as we speak!   Great info guys!  and Good luck Jonathan!!

[Jay Hinrichs]

@Account Closed  no cash on hand is nearly 100% a none starter in this business.

I think your getting the cart before the horse and of course you have heard from a bunch of HML in your area.. I am sure they are all good. but at the end of the day I am also sure they will not lend you one dime If you don't have substantial amount of cash equity into each deal.

if this is what you want to do I would first find a money partner.. that's what you should be doing CA has literally 100 HML to choose from find the lender once you have your downstroke and deal is simply dialing for dollars... Although when I was loaning I liked to meet all my clients and create long term relationships with them.. so the more local your lender and someone you can eye ball is a benefit as well.

as for lending home I actually did a loan with them ( first time I borrowed money from someone other than my commercial bank) I got their very best rate based on my experience.. however we have to FRONT the rehab and then wait to get the draw.. so you would need that cash as well.. borrowing from lending home requires a lot of capital..

[Account Closed]

@Jay Hinrichs So I've been catching up on the podcasts here on BP and learning a bit more of each piece of the puzzle. I listened to show 158 today and it really gave me some good ideas. And like you mentioned I do believe the most likely way I am going to break into closing a deal is through a partnership. 

I am thinking that I will start driving around looking for vacant looking properties, and I learned a couple of ways to look up areas that those properties might be in show 158. 

Thanks for the advice too!

[Jay Hinrichs]

@Account Closed contrary to what you hear read and see .. RE is very difficult if you have no capital.. I know when I am looking to build a new housing tract or do some other deal the first thing I do is line up my capital then I go shopping.. I know many say find the deal and the money will find you.. and that can be true.. but it helps if you have your capital line up ( and in this case your equity or down payment knowing there are ton's of HML out there that will fund good deals)... so when the deal presents itself you can pounce

[Jo-Ann Lapin]

Welcome to BP. Happy to network.