Flip with Hard Money
Birdsboro, PA · Member since 2017 · 16 posts · 15 votes
Flip with Hard Money
Most Popular Reply
Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes
9y@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...
95 Replies
- Gorham, ME · Member since 2016 · 224 posts · 116 votes9y
I don't want to discourage you in anyway, but I would like to give you a few words of caution. Getting started with low and no money down is done everyday, but you must be cautious and very calculated so that things don't go south on you.
If you have a good deal then finding hard money to fund the deal should not be a problem. Borrowing on a credit card for your downpayment could work, but I would try to find a partner to split the deal with first. Maybe a family member or good friend could lend you the downpayment and you could either give them a note or split the profits.
Hope this is helpful.
Ed
You are right in my neck of the woods. A credit card wouldn't be something you could use but I see a lot of people partner with small cash partners in an LLC when buying the property. Everyone brings a different piece of the puzzle to the table.
- Birdsboro, PA · Member since 2017 · 16 posts · 15 votes9y
We currently have no credit card debt or credit cards. There are always tons of offers in our mailbox. Does anyone have a HML who does a higher LTV that they trust?
- Real Estate Investor · Prosper, TX · Member since 2016 · 17 posts · 4 votes9yHi One of the things you can do is roll over some 401k funds into a self directed regular or Roth IRA. Then you would have some funding available at your disposal. Just a thought.
- Investor · Memphis, TN · Member since 2016 · 279 posts · 257 votes9y
@Shawn Crawley- For me, these types of HML's have been people I've connected with on a personal level in our REIA meetings, family, etc.
- Wholesaler · Roanoke, VA · Member since 2015 · 277 posts · 95 votes9y
@Sam Wilson oh ok
- Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes9y
Originally posted by @Mike Jordan:
Hi One of the things you can do is roll over some 401k funds into a self directed regular or Roth IRA. Then you would have some funding available at your disposal. Just a thought.NO! This is a terrible thought. Using funds from a retirement account on a personal project is a prohibited transaction.
The OP's idea of funding the down payment with credit card cash advances can be done. Whether it is a good idea will depend, largely, on how good a deal you have found and how likely you are to be able to complete it. The same goes for funding with a HELOC. Some people are able to accept that risk for a great deal and others are not. Make no mistake about it--if you use a HELOC you risk losing your personal residence in this deal. Having some money available to pay contractors while waiting for draws, if any, would make completing the project less stressful. (If you alienate the local contractors you may have a hard time getting another project completed--word travels fast in most towns.)
Are there lenders who will fund a rehab 100% for a first timer? Yes, but most will want you to bring some personal funds to the deal. If the deal is strong enough, if you are purchasing considerably below market value, you will find better terms. (It is not all that difficult to find private lenders who will lend funds with no payments until the rehab is complete and the house is sold.)
The more experience you have, the more funds you bring to the table, the better the deal, the more likely you are to get funding and the better the terms of your loan will be. Do everything right and it may not be very long before you have multiple funding sources available for your projects. - Real Estate Agent · Tulsa, OK · Member since 2016 · 408 posts · 242 votes9y
I see your desire to start in this business and I love your confidence! But, the fact of the matter is that you have no experience. People are discouraging your strategy because you are opening yourself to lots of risk and you are asking other people (hard money lenders) to open themselves to risk also.
You personally know how hard you and your husband are willing to work how smart you are.. etc etc. BUT, that has not been proven to anyone at this time..
Try walking in the Hard Money Lender's shoes... you have a newly formed company.. you have not made any money. You are seriously starting with $0. They most likely want some skin in the game.
All this to say is form a relationship, any lender wants to see their money protected, some are more organic than others: you have experience flipping houses and have paid all the money back I have lent out (HML), you make enough money on your w-2 to pay the mortgage (Fannie/Freddy)
So on and so forth.
Here are some of the rates I am getting in Tulsa, OK from a local Hard Money Lender:
12.75% on a 15 year am
293.00 in additional charges (depends on how much based on the mort tax, but VERY low charges tacked onto the front end)
If you pay it off in the 1st year, 1% pre-payment penalty.
Here are some of the rates I am getting from a Bank on a Commercial Loan:
20% down
5-6% 15 year am, first 3 months interest only (interest rate may be off)
Will loan 100% if can land 70% LTV (with approved repair list) and they have an online underwriting system that determines ARV (they don't take into account revitalization, strictly beds/baths/sqft etc.)
- Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes9y
@Danielle C. - Good advice above.
Your best bet is to partner with someone else on your first deal where they provide a lot of the capital and you provide a lot of sweat equity / rehab services.
Join your local REIA and meet people there. Hand out your business card to everyone. Staples will make you 500 business cards for $10 in 1 hour.
How's your own budgeting? Given all your assets, income and spending, is there anything you can reduce to save up cash so you can save yourself 10-14% in interest? I rent out spare bedrooms in my house at $500+/each to nice professionals.
You said you don't have a lot of capital, and you're investing $$ into forming an LLC, your real estate license, and other educational classes. I spent $500 to make an LLC, about $1500 first year on my RE license, and $1000 in recent education. That's all money I can't do a deal with.
Quite a few foreclosure / REO listings say that they won't pay me a commission as a buyer-agent. So, for a buy and hold strategy, it doesn't benefit me to be an agent (except for on-demand touring) for all those properties.
- Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes9y
Originally posted by @Michael Mullins:
To answer your question simply, yes. Depending on your credit card limits it can be a great way to use funds and SUPER cheap. For instance, if your credit cards are like mine, then every month you get 2-3 "convenience checks" issued for you to use anyway you like (though they want you to transfer balances). The checks can be written to cash for 0-3% transaction cost and 0% interest for 12-18 months depending on the cards. You have to make sure that the branch you cash the check at has the amount of cash on hand, so call ahead. As long as you can pay the monthly minimum which is between 1-2% of the balance and you can confidently flip out the house within the limited timeframe, then do it. You won't find cheaper money anywhere else. I recommend that you have at least two cards with equal limits so that you can max out the one card, paying it back over the 12-18 month period, and if you have to transfer the remaining balance you are only going to pay 0-2% transaction fee on the reduced balance (again, much cheaper than conventional methods) and have enough credit limit to allow the transfer, just don't ever miss a payment or the back interest will be dropped on you at around 25% APR. I have personally borrowed 20, 34, and 40k from my card(s) at once, over the years. Discover even has 0% transaction fee balance transfers and 0% interest for 12 months if you need to float a little longer than the timeframe of the convenience check. I also recommend offsetting and timeframes by 6 months so things aren't due all at once.
This seems to be an OK practical Idea for smaller loans like say $30K or $40K. Most of my CCs max out at 40K. Some of you high rollers might have credit cards for larger amount, but I don't. lol
However, my question is when its time for taxes, how do you truthfully deduct interest expense for the LLC when the LLC is not the one getting the loan, but you as an individual getting the loan and paying the interest. Even though LLC is a pass through entity, wouldn't this fall under the classic case of co-mingling the personal funds with business funds? Now, not a CPA or even an accountant, but can this not get super messy?
@Steven Hamilton II Any thoughts?
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Danielle C. in my mind if your going to actively flip properties you MUST be an agent ... many times the money you save on commish will be your total profit. Plus you can scout the deals in real time.. network with other agents that will have deals.. Like I said I just can't imagine \being in the flipping business and not listing your own props.
- Real Estate Investor · Prosper, TX · Member since 2016 · 17 posts · 4 votes9y
Just to follow up on the contradicting IRA response, the gentleman is mistaken. Educate yourself on this subject then discuss it with your CPA.
It normally takes two to three weeks to open an account at a typical brokerage firm, and you'll need to find a custodian who will hold real estate inside an IRA. The down payment must come from IRA funds, so rollovers may be required.
When a real estate investment is contracted, the IRA account holder reviews and signs the purchase agreement and then the custodian must approve it and release of funds to the title company. All of this takes time, so it's prudent to learn as much as you can before jumping into a decision.
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes9y
Originally posted by @Mike Jordan:
It normally takes two to three weeks to open an account at a typical brokerage firm, and you'll need to find a custodian who will hold real estate inside an IRA. The down payment must come from IRA funds, so rollovers may be required.
When a real estate investment is contracted, the IRA account holder reviews and signs the purchase agreement and then the custodian must approve it and release of funds to the title company. All of this takes time, so it's prudent to learn as much as you can before jumping into a decision.
Just to make sure that the expectations are accurate I would like to add my 2 cents:
In order to invest in real estate (or any other non-traditional investments) brokerage account will not work, you need a self-directed IRA, here is a list of companies that BP had put together who offers such services:
https://www.biggerpockets.com/rei/self-directed-ir...
Also, when entering into a contract, account holder reviews and approves the contract but the custodian must sign it because custodian is buying and taking title to the property on behalf of an IRA. They also must release the funds and pay all expenses related to the investment. Some find this inconvenient and time consuming so they go the route of Checkbook IRA. In this case single-member, special purpose LLC is established that is owned by the IRA and managed by the account holder. That is how "checkbook" control is achieved over an IRA.
- Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes9y
It also may be best to process the investment inside a solo 401k plan instead if you qualify.
Following are the similarities and differences between the solo 401k and the self-directed IRA.
The Self-Directed IRA and Solo 401k Similarities
- Both were created by congress for individuals to save for retirement;
- Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
- Both allow for Roth contributions;
- Both are subject to prohibited transaction rules;
- Both are subject to federal taxes at time of distribution;
- Both allow for checkbook control for placing alternative investments;
- Both may be invested in annuities;
- Both are protected from creditors;
- Both allow for nondeductible contributions;
- Both are prohibited from investing in assets listed under I.R.C. 408(m); and
- Neither may be invested in your own business.
The Self-Directed IRA and Solo 401k Differences
- In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
- To open a self-directed IRA, self-employment income is not required;
- In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
- The solo 401k allows for checkbook control from the onset;
- The solo 401k allows for personal loan known as a solo 401k loan;
- It is prohibited to borrow from your IRA;
- The Solo 401k may be invested in life insurance;
- The self-directed IRA may not be invested in life insurance;
- The solo 401k allow for high contribution amounts (for 2016, the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
- The solo 401k business owner can serve as trustee of the solo 401k;
- The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
- When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
- Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
- When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
- Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
- Pre-tax IRA contributions on reported on line 32 of Form 1040;
- Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
- Roth solo 401k funds are subject to RMDs;
- A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
- Roth IRA funds are not subject to requirement minimum distributions (RMDs);
- The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
- The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
- At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
- At termination, the self-directed IRA is only required to file a form 1099-R.
- Real Estate Investor · Prosper, TX · Member since 2016 · 17 posts · 4 votes9y
Mark...good information for sure! I currently have a self directed Roth IRA.
For flips not at all and from what I've seen can be a net positive (save on commissions, mls access, etc). Licensing may become a problem when you get to the more creative forms of buying and selling or holding real estate (subject to, lease purchase, and various other forms of "transaction engineering").
- Ridgefield, WA · Member since 2017 · 6 posts · 4 votes9y
I don't have much experience but I tried this with my lender. It didn't work. Here was my situation (simplified):
Piece of land: 85k, Cost of Construction: 200k, Selling Price: 320k, and potential Profit: 35k
I went to my lender with these numbers. He said no matter what he needs something to fall back on if I default. With no down payment, he had nothing.. no backbone. He said, "imagine this - if you put down 50k, and I give you 285k for the project, then technically from day one, before any construction.. I technically, the lender, own property (1st position lien holder) that I purchased for 35k. So, I am safe because if you default even before you even build, you lose your 50k and I gain a piece of land that's worth at least 85k for only 30k (85k land purchase price - 50k down payment)."
The bank wants to be safe, that's all.
Most likely you will need to put something down or offer some good collateral. Maybe if you are willing, some equity in your home is a good place to get some cash.
- Wholesaler · Philadelphia, PA · Member since 2016 · 35 posts · 20 votes9y
Hi Danielle, Congrats to you and your husband on making the decision to get started investing. What I've learned is that people get started with various mix of resources. Time, Money, Credit, and Knowledge. The IDEAL situation is abundance of all 4, but most people especially starting out have 1 or maybe 2. Your situation is great you have Credit, limited money, and sounds like working on the knowledge. You CAN do this and Hard Money is a valuable option. What I suggest is 1. Partner with someone who could at least cover the down payment *that someone could be me depending on what location you are considering investing in. 2. There are 100% lenders though hard to find. phillyactioninvestors is one company that does this. (they split the profits with you) 3. Hard Money rates and terms are getting better and better because the competition is increasing, make sure to shop around. They want to know you are experienced so maybe talk to some local investors and have them "partner with you"/ advise you on your project so that you can use their list of experience as a reference. Maybe give them couple hundred bucks for the time. OR better yet partner with them on your fist deal. Hope this helps! Investing is a team sport so you have to build you team to be successful! Good Luck and if I can be a resource feel free to reach out.
- Lender · Lorton VA · Member since 2016 · 1 post · 1 vote9y
At the risk of getting trolled for promoting my obvious self interest, I suggest that you start with a modest priced home in a lower middle class area, where you can cut your teeth on a smaller risk investment with less cash required Using a HML (which my company is) will be a relatively small cost in dollars to your deal, while offering you the following benefits:
Speed. You will likely want to close in 2-4 weeks, and banks are not going to be willing to respond that fast. Many HML (like us) will give you POF letter in a day, a decision in less than a week.
Input: As a new investor, you may get excited by a deal that looks very promising at first glance. A good, experienced HML can give you feedback to walk away from a bad deal, or give you advice on how to get more and faster money in the sale (or NOT spend money on renovations that won't give you any return). Your interests and the HML are teh same in this...get the home sold fast with lots of profit.
Access to Funds. Private money is often less expensive and or has better terms than a HML. However, when they have all their money at work they will not have any for you. So you may have to talk to and convince many of them to be willing to do your deal. They may also be less professional in their approach. Not throwing all under the bus, but you need to know how involved the PML tends to get in your business.
Liking and understanding your business. Banks are slow to respond, don't want to own homes in extreme disrepair, and don't understand why everything doesn't go right during your project. HML, at least the good ones, know your business and actively pursue it.
OK, let the abuse for promoting my business to potential customers begin!!!
- Flipper · Los Angeles, CA · Member since 2016 · 6 posts · 4 votes9y
@Account Closed
As far as credit card advances, how high have you taken your total credit utilization? How much did it impact your credit score? Which card issuer/bank has given you the highest limit? Thanks for the tips.
- 9yDan MahoneyPro MemberFinancial Advisor · Atlanta, GA · Member since 2016 · 256 posts · 350 votes
@Nick Costello I have used 100% of a credit limit before and probably took a 50 point ding on credit score. Remember they look at this on a per account basis so even if you have zero or low utilization on your other accounts, if you go over 30% on one account it will hurt your credit score, and will hurt more if you go over 50%. Fortunately, utilization is only measured currently, so there is no "memory" of past utilization. Once you pay off the trade line your score goes all the way back up the next month.
In my experience Amex, Chase, BofA, Barclays, Capital One can all be pretty generous with credit lines, however, the easiest way to get big credit lines from these banks is to have other big credit lines showing up on your credit report (they are competing with each other). If you are trying to build up to this, google "Amex 3x CLI" for a discussion of how to systematically work your way up to larger credit lines from Amex. Note, however, that Amex does not do balance transfer checks.
Here is tip if you are concerned about utilization and credit score: Small business credit card tradelines usually don't show up on your personal credit report (unless they are from Capital One, which I learned the hard way). You are still personally guaranteeing the account, and the inquiry from the appplicaiton will show up on your credit report, but not the utilization if the account is kept in good standing.
- Flipper · Los Angeles, CA · Member since 2016 · 6 posts · 4 votes9y
Good to know, thanks! Yes, Chase Southwest has been great. I've got 60K between my personal and business cards. Here's a NerdWallet link I found awhile back that lists the banks that report business activity to personal reports.
https://www.nerdwallet.com/blog/credit-cards/qa-business-credit-cards-affect-personal-credit-score/
- Investor · League City, TX · Member since 2016 · 16 posts · 4 votes9y
@Nick Costello you can try to call all your credit cards and ask them to increase your limits. Say that you need to make a purchase or something like this. I have 4 different chase cards, which I opened on different promotions for different occasions, chase usually likes to give 0% and they send checks. My highest limit is American Express but I use this card for day to day purchases and pay it off every month. Usually if one card increase limits, other starts asking you if you want to increase your balance. Discover has promotions for 0% transfers.
Did anyone try to ask credit card for "convenience checks"? one guy told me its a great way to move money around without paying any percentage on purchase but I didn't try it myself.
- Rental Property Investor · Temple, TX · Member since 2012 · 42 posts · 31 votes9y
@Nick Costello
I have maxed out cards and paid them off with construction draws. I usually use which ever gives the highest cash back or one that gives 0% for 21 months.
If you pay it off it never effects your credit, if you don't it can drop any amount depending on how much total credit you have. Once I pay off the card, if I do hold it longer than a month, my score jumps right back and usually higher than before.
Just make sure to make the minimum payment at least and don't spend more than the property will make you. It's better to be able to do a deal with cards then to sit on the sidelines.
- Los Angeles, CA · Member since 2017 · 45 posts · 22 votes9y
Hi @Danielle C.,
First of all, congrats on taking the steps toward starting your venture. Respect.
As far as being having your license, if you are acting as the agent on your own deals, then you have the opportunity to take the commission associated with being your own agent on the deal. I personally stayed clear of this and never got my license because I would rather have the agent that brought me the deal (will continue to bring me the deals) get as much money as they can out of the deal. This builds on the relationship with said agents and should, in theory, have them bring you more deals in the future. I care WAY more about this and getting someone that worked hard on a deal paid that taking the extra 2.5%-5% for myself. I hope that answered your question.
As far as using HML and a credit card, it sounds like you are in the same position I was in recently. I was trying to save up as much money as I could to do my first deal and working with my mentor (a fairly successful real estate investor in LA) learning as much as I could until I had the money for a downpayment. Because I was patient and continued to network, I was able to connect with another investor looking for a workhorse (me!) to join him and become a partner in his investment firm.
@Chinmay J. is right. It may not be the answer you want to hear but in this industry we must learn how to say no, be patient, smart, and take our shots when they present themselves. Even if you could find a HML to do the deal with you, I don't think taking the down payment on credit card if smart since the interest alone will probably eat at your profits. I think the best thing to do right now is either (1) Get someone to do a JV with you, which will be tough since you haven't done a deal before but it is doable. You have to outline IN DETAIL everything you bring to the table and will do, showing that you are the workhorse of the deal (2) take a family loan from a wealthy family member or friend, or (3) get REALLY good at saving until you've saved enough to do your first deal. Always here to help!
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