Flipper/Rehabber · Monson, MA · Member since 2018 · 32 posts · 5 votes
Hey everyone, I am looking into real estate investing and curious to know, how you all financed your first deal? I am thinking of starting by flipping, but I do not have quite enough money to afford a 20% down loan. I also am unsure if I would qualify since I own my own home and do not make a huge amount of money extra , my debt to income would likely not qualify. Those of you who have used private or hard money, how do you find good lenders that you can trust? I also am considering partners but am unsure how to find any in my area. Any advice would be great! If anyone is in MA, connect with me!
Lender · TX · Member since 2018 · 936 posts · 713 votes
7y
@Ashley Sliwa I think you are right about looking towards hard money. Private money might be hard to find outside of family because you have not proven that you can do it yet. HMLs will lend to new borrowers but each company will do it at different amounts and for different rates / terms. I suggest you build a relationship by going and meeting with an HML in your area. They should be easy to reach. AND NEVER PAY ANYTHING UP FRONT! If they ask for money up front before you are at closing, turn and run. It may be a scam.
Once you do contact them, ask these questions:
What is your investor success rate?
This is important to know but can be lied about very easily. Many don’t track this statistic. I don’t know if it is because they don’t really care or just haven’t thought of it. I think it is probably the most important stat. Look for groups who offer referrals to local contractors, Relators, etc. Also, look for groups that have boots on the ground in each market that know the specifics of investing in that area.
How many loans have you closed in this month?
Any good HML will know this number off the top of their head. You want a lender that is busy. If they are closing a lot of loans, they probably have something good to offer. Ask about how many loans they have closed in your area. A good number will vary based on the current market and the size of your metro area. Know that many lenders will say they are nationwide but as far as I have seen, no single HML lends in all 50 states.
What is your maximum LTV?
This is a two part answer. Like the company I work with will finance 100% of the purchase and repair but to a maximum of 70% of the ARV. Meaning that if the ARV is $100k we will finance all of the purchase and repairs assuming they are not more than $70k. Another common funding is 90% finance with a maximum LTV of 70%. Using the same example from above they will finance up to $70k if they purchase and repairs are $77k or more. As you can see, this means your out of pocket will be $7k more.
Is there a pre-payment penalty?
Some will require you to pay the interest through the term or another length no matter how long you hold the loan. Just make sure that you include this requirement in your costs. Most lenders that have pre-payment penalties only have it at 3 months or less. It is pretty rare to buy, fix, and flip to a new retail buyer in less than 3 months. Just don’t use this kind of loan for bridge funding.
What is your draw fee & benchmarks for the repairs portion of the borrowed money?
Know what your fees will be to take out the repair money borrowed. Draws are almost always held back until you reach certain points in the project. They will also charge you to have an inspection by a 3rd party to make sure the work is done. I have seen this range from as low as $100 up to $300.
Do I need to pay anything before sitting at the closing table?
There have been numerous people on BP talking about how they paid application fees but they could never get their loans closed on any deal brought to the company. This is a practice by some less than reputable companies. One I saw charged $500 upfront to be pre-approved and would never actually fund any loans. Just beware. Most reputable HMLs will not charge anything until you are sitting at the closing table and all fees will be listed on the HUD-1 closing document.
And of course, what are the points, interest, and origination/document/admin fees for the loan?
This will vary based on region but in general 2 – 5 points, 10% - 14% APR (meaning this is the annual rate so divide it by 12 to get the monthly interest amount), and documents fees can be from $200 – $1,500. The document fees are what will vary wildly from company to company. Just know them going in so that you can properly budget. You will also want to find out if payments are interest only or if some principal is built in. Most hard money will be interest only payments on the full approved balance of the loan whether or not if you have pull the draw funds for repairs.
If you have any other questions, post them below so that we can all learn from the answers.
Lender · TX · Member since 2018 · 936 posts · 713 votes
7y
@Ashley Sliwa I think you are right about looking towards hard money. Private money might be hard to find outside of family because you have not proven that you can do it yet. HMLs will lend to new borrowers but each company will do it at different amounts and for different rates / terms. I suggest you build a relationship by going and meeting with an HML in your area. They should be easy to reach. AND NEVER PAY ANYTHING UP FRONT! If they ask for money up front before you are at closing, turn and run. It may be a scam.
Once you do contact them, ask these questions:
What is your investor success rate?
This is important to know but can be lied about very easily. Many don’t track this statistic. I don’t know if it is because they don’t really care or just haven’t thought of it. I think it is probably the most important stat. Look for groups who offer referrals to local contractors, Relators, etc. Also, look for groups that have boots on the ground in each market that know the specifics of investing in that area.
How many loans have you closed in this month?
Any good HML will know this number off the top of their head. You want a lender that is busy. If they are closing a lot of loans, they probably have something good to offer. Ask about how many loans they have closed in your area. A good number will vary based on the current market and the size of your metro area. Know that many lenders will say they are nationwide but as far as I have seen, no single HML lends in all 50 states.
What is your maximum LTV?
This is a two part answer. Like the company I work with will finance 100% of the purchase and repair but to a maximum of 70% of the ARV. Meaning that if the ARV is $100k we will finance all of the purchase and repairs assuming they are not more than $70k. Another common funding is 90% finance with a maximum LTV of 70%. Using the same example from above they will finance up to $70k if they purchase and repairs are $77k or more. As you can see, this means your out of pocket will be $7k more.
Is there a pre-payment penalty?
Some will require you to pay the interest through the term or another length no matter how long you hold the loan. Just make sure that you include this requirement in your costs. Most lenders that have pre-payment penalties only have it at 3 months or less. It is pretty rare to buy, fix, and flip to a new retail buyer in less than 3 months. Just don’t use this kind of loan for bridge funding.
What is your draw fee & benchmarks for the repairs portion of the borrowed money?
Know what your fees will be to take out the repair money borrowed. Draws are almost always held back until you reach certain points in the project. They will also charge you to have an inspection by a 3rd party to make sure the work is done. I have seen this range from as low as $100 up to $300.
Do I need to pay anything before sitting at the closing table?
There have been numerous people on BP talking about how they paid application fees but they could never get their loans closed on any deal brought to the company. This is a practice by some less than reputable companies. One I saw charged $500 upfront to be pre-approved and would never actually fund any loans. Just beware. Most reputable HMLs will not charge anything until you are sitting at the closing table and all fees will be listed on the HUD-1 closing document.
And of course, what are the points, interest, and origination/document/admin fees for the loan?
This will vary based on region but in general 2 – 5 points, 10% - 14% APR (meaning this is the annual rate so divide it by 12 to get the monthly interest amount), and documents fees can be from $200 – $1,500. The document fees are what will vary wildly from company to company. Just know them going in so that you can properly budget. You will also want to find out if payments are interest only or if some principal is built in. Most hard money will be interest only payments on the full approved balance of the loan whether or not if you have pull the draw funds for repairs.
If you have any other questions, post them below so that we can all learn from the answers.
Fort Lauderdale, FL · Member since 2016 · 146 posts · 27 votes
7y
Hi Ashley,
Welcome to the world of REI. :)
I will start with your original question, which is what I personally did to start out.
I had about 30k set aside, and used a Hard Money Lender. They funded 80% of the total purchase price of the property, however unlike most Hard Money Lenders, they did not assist with rehab costs relating to the project. For this, I went to an online peer-to-peer company (I don't think I'm able to credit them here, so message me if you'd like their info).
Now, I'll give you some additional ideas. :) If you can make a partnership, that by far is the BEST way to go. In my opinion you really need to do your research and prove to someone that you are truly driven and willing to put in 150% of the work just to get a percentage back. For me, partnerships came much easier after my first flip because that's how you really start meeting people who are involved in the industry, however Bigger Pockets has meetup groups all over the nation, as well as your local REIA (Real Estate Investors Association). Great way to start letting yourself be known.
The other avenue that comes to mind is the FHA route. It's NOT for house flipping, but if you are passionate about real estate and open to other methods, it's worth delving into. There are a large number of people who start out by purchasing a home via FHA at 3.5% down, and (due to legal requirements) live in the property for (I believe) at least 12 months. At that time, you can then rent it out, spruce it up and resell it, or otherwise take advantage of your investment as you please.
Hopefully this gets your wheels turning and you find the path that's best for you.
Lender · San Francisco, CA · Member since 2018 · 1 post · 0 votes
7y
Great advice @Ryan Blake! These are great questions to ask to help filter out Hard Money Lenders.
I am learning there are a lot of HMLs that charge up front. There are also a lot who wont even give you the time of day when they find out you are doing your first deal.
One thing I would add is to also ask how loan terms affect pricing. For example, if you take longer term loans, a lender may opt to charge a minimum interest amount, or prepayment penalty.
Very good question. I think that paying for the appraisal is much more common because it is a large ($300 - $450) expense that needs to be fronted by someone. The company I work for has the borrower pay that money directly to the appraiser so that there is no question where the money is going. I think that is the best way but I could see other companies handling the transaction for you. If that is the case, then please be sure to get the license number of the appraiser by the state board that regulates real estate transactions. You want to make sure the money is going to that person. Otherwise the lending company can just keep your money and no application or appraisal is ever actually made. This is really the only expense I would ever suggest paying. A few charge a $30-$50 credit pull fee. That is also somewhat understandable but still isn't really necessary to be done in advance. Many HMLs will just roll that into the closing costs and collected it on the closing docs or in their fees.
Plymouth, MA · Member since 2018 · 23 posts · 7 votes
7y
I am from Ma also. I am looking to stat investing but I will be buy and hold. That was some good info for me as well thank you. And good luck Ashley. My wife and I are going on vacation we will be back at the end of January. Maybe run into you at a meet up.
Flipper/Rehabber · Worcester, MA · Member since 2016 · 179 posts · 113 votes
7y
@Ashley Sliwa took a 401k loan for the 20% down and hard money for the rest plus rehab costs. My plan is to make the 401k loan payments, tax payments, personal payday all with the flip profits and recycle the rest of profits into the next flip. I will keep repeating this cycle until it stops working.
Springfield, MO · Member since 2017 · 158 posts · 114 votes
7y
@Ashley Sliwa with you being brand new to investing i would be very cautious with hard or private lending. Not a knock on you but you have very minimal education in that area and you could easily get taken advantage of. Just save your own money until you get enough for a down payment.
Rental Property Investor · Denton, TX · Member since 2017 · 51 posts · 17 votes
7y
@Ryan Blake you should write a book. I’ve been involved in real estate the last 2 years and haven’t seen a break down so well put out. Well done... and thank you.
Rental Property Investor · Denton, TX · Member since 2017 · 51 posts · 17 votes
7y
@Ashley Sliwa
@Jessie Nunley
Brings up a good point. He’s playing it safe. I like it! It’s on you to do the homework. If you wanted to focus on what your making now and try your best to work overtime and make more go for it. Spare time focus on your research an other avenues, hard money, etc. (Not knocking Hard Money Lending)
My mentor has instructed me to save to 50k for investing and then told me to add another 30k for safety. That’s a goal of 80k he wants me to have ready before making my first investment. He doesn’t want me taking any loans or hard money lending to get started. Just a thought.
Which is great, although I have an itch to invest now. I’m forced to wait do more and more research and save. Not to mention learn from my BP family.
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
7y
@Ashley Sliwa. The type of debt matters because different types of debt have different interest rates. Credit card rates are the highest and you should pay that off immediately if you can. Then usually followed by student loans and mortgage or car loans. If you're carrying a CC balance to, your credit may not be as good as it could be. My suggestion is pay down or pay off your other debt and then look at increasing income to get your DTI sorted out. You don't want to borrow more money when you already owe a lot of money. REI is not some magic type of investing. You need cash, credit and knowledge to get good at it.