Flip with Hard Money
Birdsboro, PA · Member since 2017 · 16 posts · 15 votes
Hi All!
My husband and I have recently gotten our LLC approved by Pennsylvania and are on the look out for our first fix and flip. I have a question about hard money. We are looking at multiple hard money lenders to finance our deal. Would we be able to use a credit card as the down payment for the loan? Is there a better way to get down payment money? We don't have much in the way of capital as of right now, but both of us have credit scores of 820. Thank you!
@Luke Mitchell and @Danielle C. - So let me get this right.. You want to use HML who charges about 10-12% plus 3 to 5 points, and in order to be funded by HML you want to use another source of money which even charges higher interest rate (anywhere up to 25%). This is not just a terrible idea in theory, but practically speaking, I won't be surprised if most HML would decline to work with you, It shows that you are not financially sound for the deal to begin with..
If you don't have the money yourself, have you considered a JV with someone who might be able to bring cash to the table? Of course, the JV might want you to have some skin in the game (unless you have some other skill you are bringing to the table), so you might have to contribute at least something...
How does having a real estate license factor into your flips (anything besides access to the MLS and the ability to sell properties)? I see you are a realtor
Good question.. It helps me save lot of money, as I can apply my commission directly towards the closing costs. Also, when I list, I don't have to pay the listing agent as I am the listing agent myself. Also, thankfully, I am blessed to be associated with the company that lets me keep 100% of my commission with very small amount going towards their processing fee. Something like $395.
@Danielle C. Yes, you can use a credit card advance to fund your deal. I am getting "balance transfer checks" from credit card companies every week offering 0% interest for 12-18 months (though in the fine print there is usually a 1-5% fee up front). This timeframe could work for a flip and would be a lot cheaper than hard money. If you are getting these offers you can just write a check to your LLC and then use the LLC to buy the house and fund the rehab. You'd need to complete the flip before the 0% promotion rate ended because it usually jumps up to over 20% after that.
However, just because you can do something does not mean that you should. Your comment expressing concern about "putting our personal home in the mix" suggests that you may not appreciate the level of risk you are taking on with a 100% debt financed deal, minimal cash reserves, and no experience. You will not avoid a personal guarantee under any circumstances, which means your home will be at risk whether you do the HELOC or not.
You should only invest (or borrow) an amount that you can afford to lose (or repay) if the deal goes bad. I am concerned that you are biting off more than you can chew. I sincerely wish you the best.
Thanks. You were trolling earlier, but it's all good. I'm here for advice so any is welcome. The HML obviously requested you as a PG. Do you have a LLC or are you operating as a sole proprietor?
I do have LLC. HMLs typically only lend to LLCs. But if I were to go the traditional route with a traditional bank, I would be doing it under my own name. Since most banks don't lend to LLCs. Also if you need to refinance from HML into a traditional mortgage, you would (in most cases) need to transfer the deed to your personal name.
In addition to what you already mentioned being able to quickly get inside MLS properties and write your own offers are a couple of the upsides of being an agent. I got a deal last week that I would not have snagged if I had not been my own agent. I personally inspected the property and had an offer submitted within minutes of it hitting MLS. The deal was under contract before a lot of other people even knew what had happened.
It costs money to maintain a license so you need to make sure you're getting more out of it financially than you have to put in.
Here's an idea. Perhaps won't work if it's your first and they want you to have skin in game, but if LTV is right- find a HML who will 100% fund the deal (I have them) in exchange for 50% of net profit. You only want to do this when in a jam, as splitting profits suck. Better though to take part of something than all of nothing. Just an idea.
In addition to what you already mentioned being able to quickly get inside MLS properties and write your own offers are a couple of the upsides of being an agent. I got a deal last week that I would not have snagged if I had not been my own agent. I personally inspected the property and had an offer submitted within minutes of it hitting MLS. The deal was under contract before a lot of other people even knew what had happened.
It costs money to maintain a license so you need to make sure you're getting more out of it financially than you have to put in.
I am still somewhat old school where I actually visit the property before making an offer. Still not comfortable doing it blind, but I know a lot of investors do that. Yes, the great thing about having access to MLS is that you don't need nobody to help you out. You can research properties at 2:00 AM if you'd like.
As far as license, here in VA it takes about $2000 or so to keep it active. One small real estate deal breaks me even and then some more.
@Chinmay J. I did go visit the property. I can't see myself ever making a blind offer. I know others do but it would scare me to death.
@Chinmay J. I did go visit the property. I can't see myself ever making a blind offer. I know others do but it would scare me to death.
Yes, I didn't mean you. I was just talking in general
@Chinmay J. is the rehab 100% covered?
@Chinmay J. is the rehab 100% covered?
I certainly "hope" so. And what I mean by that is assuming my calculations on rehab are in the ball park, the money they are lending me is going to be enough to carry out the rehab. I was told by my HML that there is no way to go back and get more money. So if I do fall short, I will have to get the money from somewhere. This subtle nuance could be different with some other HML, so do ask when shopping around.
Draws are on as needed basis, but no fees for it.
If it was easy everyone would be doing it! That's what I tell myself every time I hit a snag on my deals/rehab/ etc.
If you enjoy sleeping at night I would go nice and slow on this.
The last thing you want to do is lose your *** on a project that you can't wrap up. You have to take so much into consideration.
Contractors, unexpected issues that arise, house sitting on the market. In this business you can literally lose everything.
I would focus on one thing at a time. If you are getting your real estate license why not focus on this and close some deals? In this business you will meet a ton of people that are already doing what you want to do.
Network, ask someone if you can help them on a project so you can see how it works. Unless you have construction experience.
I flipped about 10 house before economy tanked and I'm currently
Working on my second one after getting back into it. It can be pretty scary stuff if you don't have a handle on it. I used all my own cash, and it still can get overwhelming dealing with contractors, etc.
I have talked to a hml, but haven't decided on it yet. I would want to try it to see how it works, but I have my own reserves if necessary.
Good luck.
My husband is a contractor on the side (his full time job is in the auto collision/insurance industry), but he rehabbed our entire house by himself and does projects for others as well. I'm working on my license purely for our business. I am hoping to take the research stage slow but move quickly on the flip. Still in the information gathering stage, so I definitely appreciate any information. I joined a local investor group and have been using that as a place to network, but still haven't "pulled the trigger" and really looked for a deal. I have my licensure test in mid March, so I have been focusing on studying as well as scouring BP forums for more information. What area are you in?
I read through the entire thread and I don't know why people are negative towards hard money lenders. I use hard money on most of my flips and I am grateful for it. All you have to do is factor in your hard money costs to make sure the deal makes sense with using hard money. Once you build a relationship with a few hard money lenders they usually start to give you preferred rates. I have 4 hard money lenders that I have either used on a flip or who are wanting me to use them with my next flip. Here are some of the terms that we have found in our market of Arizona.
90-100% of purchase price at 16% interest and $1100 doc fee, no points.
92% of purchase at 12% interest with $700 doc fee, no points.
80-90% of purchase and rehab at 12-15% interest with 1-2 points.
80% of purchase plus doc fee.
We have a HELOC, some business LOC, and several credit cards with high limits. We usually don't put any of our own money into the deals and we haven't had any hard money lenders deny us because of that. They are in first position and we have a great track record so they don't ask if the money we are putting in for the down is our own or if it is borrowed.
The problem with trying to get bank loans is it usually takes too long. One of the advantages that an investor has over a traditional buyer is speed. You can usually offer a lower price if you can promise a quicker close and a cash offer (hard money is the same as a cash offer with our offers).
Credit card companies often advertise 0% cash advances for 12-18 months for at 2-3% fee. This is a great source of money. Say you have 5 credit cards between you and your spouse and each has a limit of 20k. You could get 10k from each card and have 50k to use towards the down payment and the rehab. You would be charged $1500 (at 3%) to be able to use their 50k for a year. That's great. The thing to keep in mind though is you need to keep your accounting straight and if you make purchases with the credit cards after the cash advances then you start paying interest on the new purchases right away. So you might want to have a different card for your other day to day purchases. Make sure you pay the cards off before the 0% term is over. Also, you will probably see a dip in your credit scores while you are using your lines of credit so keep that in mind because it may effect interest rates on things that you might need for your self like a car loan or a personal home loan or if you want to get a cash out loan on a buy and hold property.
With all this being said, I do agree that partnering with someone who has successfully done some flips is a good idea. You can offer to put up money for the down payment and the rehab in exchange for experience and training. This could end up saving you a ton of money from the mistakes that you will most likely make as you learn the process.
I hope this helps. Good luck and let us know how it goes.
@Danielle C. So there are a couple things that I would suggest.
First: If you try to finance it through your LLC, typically banks/lenders will only lend to you if you have been in business for 2 year or more, and then they will only be able to lend on 20% of your gross revenue. it will depend on what lender but most won't take the property as collateral under an LLC.
Second: If you try financing through your personal it will be safer, and you mentioned earlier that you would be scared to get a HELOC and finance it that way vs a cash advance on a CC. I will tell you there is less liability with a HELOC than a CC cash advance (also, a CC cash advance will only let you get 10% of your credit limit as cash (never heard of a card allowing you to get 50% of Credit limit as cash out) - so unless you have a 200k Credit limit don't think it will be helping much, also if you are trying to do the 0% for 12-20months you have to do that in the first 30-60 days of receiving the card.). For instance if you go through Huntington, and you get a HELOC (as long as you have equity in your primary, enough for the downpayment etc) the money you draw from the HELOC you will only be required to make interest payments. for example:
30k HELOC at 4% will cost you $95/month minimum
30k in CC cash advance will cost you (assuming a very generous 18%) will cost you around $430 in payments per month.
so the cash flow using the HELOC even though it is on your primary is the better choice to get you started and maximize your monthly cash flow and minimize expenses till you either re-sell or rent out. once you do that you can pay it off and use it again. That is the beauty of the HELOC, you can keep using it as you pay if off. if you are adamant about having your LLC own the property, once you finance it personally, you can deed it over to the LLC, but getting finance from the get-go with your LLC will be next to impossible in my opinion.
I've never used a hard money lender, however, if you can get financing through a normal bank I would recommend doing it that way first, just because the rates will be better. If your DTI is tight that might be a reason to go the HML route though.
@Donovan Keim I have used several cash advance checks that they have sent me and I have used between 10k on a 12k card and 30k on a 50k card.
@Shiloh Lundahl using cash advance checks will get you the 0% but, I don't hear of a lot of people getting them like you do on a regular basis. I'm a little surprised that you do (great for you). using cash advance checks are different than going to a bank and getting a cash advance from the card that way, or going to an ATM, I guarantee the limit on that will be 10% if not close to it. I wouldn't steak a deal on using CC's regardless, even if it was 0%. but that's just me :)
@Donovan Keim Yea, don't get cash advances at the bank or ATM. Just use the credit card balance transfer checks. This strategy works well for people who can stay organized and don't get over extended. And yes you would need to keep in mind the monthly payments for the cards.
@Danielle C.
Hi there! For my first deal I partnered with someone that had enough cash to supply a down payment and 6 months holding costs for a HML.
We had been talking for about a year and he knew my story and one day he said he would back me. So I found a property, we used a HML for purchase and rehab and he funded the holding costs. I managed the project and handled everything else and when it sold I reimbursed the amount he loaned the LLC & then we split the profit 50/50.
While using a HML is expensive, they are also your partner. They will let you know if the deal is good or bad and they hold the rehab funds so the contractors can't take off with the money. I'm glad I used one for my first house and I would use them again if necessary.
As for your position, if you can find someone to JV or partner with, I would do that. If not, then I would save money or figure out how to get money to cover 6 months of holding and down payment. I would also suggest to connect and build relationships with your HML and go network at any REIA's in your area.
Hope this helps!
One thing that nobody else has mentioned is how the HML pays on draws. You see, before the HML pays a draw, work must first be completed and the HML will inspect to see that the work was done, only then does the HML pay a draw. But those who did the work might not be willing to wait for that draw for their payment (especially with little experience on your part), so you will probably have to be able to fund ongoing work yourself.
@Danielle C. if you have a good credit score don't you get offers from credit cards for 0% for 12-15 months? You can open these cards just when you are about to do your rehab and you can call them and ask for checks. They usually charge 2-3% but you can use these checks to pay your hard money lenders or put these checks into your LLC bank account and then pay your hard money lender directly from your LLC. This is part of my plan when I find my fix and flip deal.