Fix and flip with hard money lender in Chicago

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Fix and flip with hard money lender in Chicago

Jameson Dixon
Chicago · Member since 2019 · 11 posts · 11 votes

Hi all! I decided to try and start for my first property.  My Uncle introduced me to a contractor he used to work with yesterday who buys cheap houses on the south and west side of Chicago and flips them or rents them out on section 8. He does most of the repair work himself and from the sounds of it, he seems very knowledgeable about this field. He asked me if I'd be interested in starting with a fix and flip. I was curious how do people usually fund these? I have funds saved for a down payment, but I was thinking of using a hard money lender.  Anyone used a hard money lender for their first one? How difficult is it to get a hard money loan? 

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Dominique Hicks
Real Estate Agent · Chicago · Member since 2020 · 1 post · 2 votes
5y

Hi @Jameson Dixon! Last year my husband and I completed our first flip using a hard money lender. The process was not extreme, but if you have not already, you will likely need to set up a LLC (or some other sort of business name). You may likely will need to have more cash available with these lenders right now due to the pandemic. The company we used last year is now requesting more upfront for reserves. They are also not approving loans with a purchase price less than $100k. As a result, we are now seeking another company to go with. Finding a reputable company that will efficiently get the job done based on your needs can be difficult. I'm searching and reaching out to seasoned investors for guidance as well. @Bronson Massas Do you service Chicagoland area?

By the way, I'm in Chicago and I'm also a licensed Realtor. Let me know if you have any other questions.

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  • Dominique Hicks
    Real Estate Agent · Chicago · Member since 2020 · 1 post · 2 votes
    5y

    Hi @Jameson Dixon! Last year my husband and I completed our first flip using a hard money lender. The process was not extreme, but if you have not already, you will likely need to set up a LLC (or some other sort of business name). You may likely will need to have more cash available with these lenders right now due to the pandemic. The company we used last year is now requesting more upfront for reserves. They are also not approving loans with a purchase price less than $100k. As a result, we are now seeking another company to go with. Finding a reputable company that will efficiently get the job done based on your needs can be difficult. I'm searching and reaching out to seasoned investors for guidance as well. @Bronson Massas Do you service Chicagoland area?

    By the way, I'm in Chicago and I'm also a licensed Realtor. Let me know if you have any other questions.

    2Reply
  • Jonathan KlemmBusiness Member
    Moderator
    Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
    5y

    @Jameson Dixon- I can recommend a couple of good hard money lenders if that is what you are thinking is best.

    Most fix and flippers are either using hard money or private money.  How much money do you have for a downpayment because you'll need that either way?

    The other thing about hard money is they want to see your experience (hopefully you can use your contractors) and underwrite the deal to make sure the numbers.

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  • Steven Foster Wilson
    Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
    5y

    @Jameson Dixon Hard money can be an excellent way to end and scale a rehabbing business. However when you are first starting out it can be difficult because you have no track record, I would recommend partnering with people for the first couple of deals, jut to build up your portfolio of experience!

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  • Tom Shallcross
    Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes
    5y

    @Jameson Dixon - I still use HML, most likely through the same national and local Chicago names @Jonathan Klemm is referring to. HML provides a great way to scale, but there is obviously risk involved. A few random points to consider off the top of my head:

    -Understand all your upfront fees (points, processing, 3rd party, draw/inspection) and calculate a total cost of fees and expected interest to be paid. 

    -After your downpayment, you'll not only need reserves to pay for extras and unexpected items out of pocket, but that you also need funds to make all the monthly payments and other holding costs, these add up. 

    -How's their draw process? Turnaround time, costs, and expectation? Are you going to have to pay the contractor first and then be reimbursed? If so, do you have the funds?

    -How's their interest calculated? Off the total amount borrowed from day 1 or off the purchase and then the drawn amount added on after the draw?  

    -When starting out and calculating your hold time, it is almost inevitable your rehab will take you longer than anticipated. Also likely that your time to sell will also be longer (even in this hot market, most people forget that once they get an accepted offer, you're still another 30-60 days to close depending on how quick lenders are moving in this environment). 

    -When is the loan due and what happens if the home is not sold/refi'd by then? 

    Not meant to scare you by any means, you just want to ensure you have solid answers and a sound game plan.  

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  • Mike B.
    Developer · Chicago, IL · Member since 2013 · 433 posts · 356 votes
    5y

    Using HML takes careful planning. One thing that people don't consider and to piggyback off of @Tom Shallcross a bit is draw time and holding costs. How long does it take your hml to fund draws? I've seen up to two weeks between draw inspection and draw payout. If you're planning on 3-4 draws, that can be 6-8 weeks of unexpected holding costs. Further, you need to consider all of your monthly holding costs, not just servicing the loan (i.e... gas, electric, water, insurance, lawn care/snow removal, etc...).

    Please note, If you plan to get full permits from the city, you'll have to stop work for their inspections as well and factor that time into your holding costs.

    HML's are typically one year loans so $100k @ 10% = $10,000/12 = $833.33 monthly payments (interest only).

    Also, if your contractor can not afford to carry the costs of the rehab and get reimbursed, then you will have to come out of pocket for the first draw as well.

    1Reply
  • Jameson Dixon
    OP
    Chicago · Member since 2019 · 11 posts · 11 votes
    5y

    Thank you all for this information. Very helpful. 

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