I'm a relatively new investor (2 flips so far) and am running into a problem where I don't have enough money to pay the down payment and interest payments on my hard money loans.
How does everyone get through this problem?
Thanks in advance for your help!
make the term longer so the payments will be less but make sure when you have the money to pay it all back with no pre-penalty
Refinance or sell if you are about to drown. HML should be used sparingly if ever.
Find a Private lender. Offer them more on the return if they fund the entire cost.
Sounds like you've done two flips with hard money before. Why is this a problem for you now? Or are you looking to do multiple flips at a time?
3 solutions I can think of:
- Private lenders (either to do the entire deal or gap funding)
- Find another hard money lender who makes you put less down payment and/or has better terms
a good private lender won't charge you interest until you flip the deal. If you get really good you'll develop a model where you "capitalize your interest and nonpayment" by borrowing more BUT you need to steal a D-E-A-L DEAL for that setup.
You're referring to permanent financing with amortized loans. Hard money loans are usually interest-only, so the length of term has no bearing on the monthly payments, only the interest rate itself. They also usually have no prepayment penalties, unlike the long-term loans.
That's a very bold general statement from someone on the opposite end of the country. Purchase prices where Gabriel is located average $200k - $300k, so unless he has cash (or a private lender / partner with lots of cash), it's hard to avoid hard money. Conventional loans for flipping (such as HomeStyle Renovation) don't work in this area because most deals need to close in under 2 weeks.
Plus, it's very possible to get hard money at rates equal to or cheaper than private money. I get hard money at 8-10%, whereas most investors in this area pay their private money 8-12%.
"Good private lender" is very subjective. If I have one that asks for 4%, but with monthly interest payments, does that make them not a good lender? I have friends who are working hard for their startup, hoping it'll go big and at IPO they can cash in $2M and retire from that by placing it with me for 6% (essentially a $120k salary). They'll live off the monthly payments. I would consider these to be very good private lenders.
Although I'm on your side; If I had a choice, I'd prefer to pay them at the end of the project or fixed period of time vs monthly. Easier bookkeeping and less hassle.
@Nghi Le that's what I'm saying. If you're doing good deals then you should be able to find a lender that will collect interest at the end of the deal vs monthly.
@Nghi Le I said sparingly. If you can't service the debt, then you have too much debt. Or maybe flipping is not a good strategy for that market. Hmmm
Thanks all for the comments.
@Nghi Le It's a problem now because I am getting deals but can't do anything about them because all my money is tied up in flips. I suppose I could wholesale but I'd rather do the actual flip. I enjoy it :). And you're right about the area essentially requiring hard money. Sounds like you're running into the same problem? (I think I've actually met you at the Fixated meet up...)
I think the gap funding you mentioned is what I need to figure out. I've heard that mentioned before. Is that usually done by individuals or institutions?
Thanks again everyone, good luck out there.
I haven't seen a market that didn't support flipping, although it seems like it in our market right now. Just have to buy it and run your numbers right. Debt service usually isn't a determining factor of whether a market is good or bad for flipping. The last house I flipped, my monthly holding cost was $8,000/month. My loan balance was $860k.
Most flippers use hard money to fund their deals. It's just the standard way to do things. Most of them don't like it either, but it's the difference between doing a deal and not doing one, especially here on the expensive west coast.
Most people run into that problem eventually, but the number of concurrent flips where they hit that wall differs for each person. Right now I'm primarily doing flips in Pierce County (much cheaper price points than King County) and in a few other states. I'm able to do it highly leveraged (90% of the purchase price and 100% of the rehab is covered by hard money), so I can handle 5-8 projects at a time. If I were in King County, I could only do 2-3 projects at a time. I also have partners who contribute both time and money, so we can scale.
My problem, and it seems like a common problem among flippers in our area, is finding the deal. I went to a real estate meetup on Monday of about 50 people. Seems like 90% were flippers, and there was one wholesaler there. They were all hungry for deals (and ready to close within 2-3 days). A year ago, it was 60% wholesalers. Our market has changed dramatically.
The gap funding is usually with private investors. If you can convince your own family and friends you can get the rates down cheaper. If you go to a local real estate meetup here and meet someone who does it almost for a living, I've seen them charge as high as 20% interest, 5 pts. Also be careful because some hard money lenders want your money seasoned or don't allow second lien holders.
I'm going to the same Fixated meetup tomorrow if you want to chat more. I also sent you a PM.
@Nghi Le I'm glad that you are doing well with flipping. When do you think you will be able to stop? Most people that I have met that flip houses do it in order to generate cash so that they can buy property to hold for the long term. This is how they grow wealth. I'm sure you are making money with $860K houses, but what are you doing with it?
The loan was $860k. I sold the house for $1.25M. I actually lost money on that deal; made a post on BP about it so others can learn from my mistakes. Since then I've stopped purchasing high-end flips and started moving to cheaper areas. I focus on volume flips now in order to reduce risk and get better terms from hard money lenders.
I'll stop when it becomes a headache. At this point, I still love it. It's the shiny object of real estate. The shininess helps me raise private money a lot better than just numbers on a spreadsheet.
At the same time, I started doing some BRRRRs last year and will continue to do a few this year. But I really think that it only takes one real estate cycle to turn someone into a multi-millionaire, as long as you know how to ride it. The past few years have been kind to flippers across the country, whereas it's getting harder and harder to find good cash flow deals. Maybe it's best to continue to build up cash so that when there is a correction, you can buy for cash-flow then.
I don't want to hijack the OP's thread, so feel free to PM me to continue our conversation. I read your profile, and I applaud you for your success in RE as well. I think it's a slower way to wealth, but definitely less risky. Different strokes for different folks.
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