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...
I just want to put in a good word for some HML's out there. We have two that we have worked with: one in Redding, CA and one in Boise, ID. Both are great. We generally have to put 25% down (which is the drawback), but we're not paying any points and we're only paying 10% interest (I say 'only' because some people throw out numbers like 14-15% or more). Granted, we have cash reserves, but their terms are worthwhile for flipping as we don't hold the property very long. The biggest benefit we have seen in using hard money is our ability to be more competitive in our very competitive CA market. We still can't compete with all-cash investors, but hard money is a close second because we can close so quickly (7-10 days in most cases.) This gives us a real advantage over bank loans and the application process is much, much quicker. When you're making a lot of offers and doing a lot of transactions, time is money. Yes, we're paying more in interest but when you're holding a property for less than 4 months, it doesn't make a huge difference (note: we are buying at the lower end of the housing market - not multi-million $ homes where a couple of months and higher interest could, indeed, make a big difference) That said, not all hard money lenders are created equal for sure (and they don't all charge points, either!) But don't be scared away entirely. Keep looking for one that comes well recommended and offers terms that are right for you. Many, many investors start with HELOCs or by refinancing their current home to pull out their equity to get started. Many use credit cards. These methods have worked for a lot of people and many of us have to get creative if there's no rich Uncle in the family. Whatever method you choose, it all comes down to your individual ability to manage your money. Based on your credit scores it sounds like you're pretty good with your money. You have to decide what method works best for you and then take the plunge. As long as you buy right (make your money going in) you'll be as safe as anyone can be. There are no guarantees and real estate investing is not for the weak hearted but you've armed yourself with a lot of education and that counts for something.
Danielle, I recently used a hard money lender for my first flip so I thought i'd share as it might help you out. I went the route of HML because I had read that it would be quicker but it was in fact much longer than had I went with a bank. Took about 7 total weeks from start to end. This could be due to it being my first flip and them having to do more due diligence and also there was an issue where a 2nd appraisal had to be ordered because of a mistake. In the beginning I contacted two HML and they had 2 different deal structures. Since it was my first flip, one was willing to lend 70% of both purchase and rehab costs and I'd have to come up with the other 30%. I believe they wanted 2 or 3% origination and 12% interest. The other would only loan me 80% of the purchase price and i'd be on my own for the 20% and all rehab costs. This loan had 2% origination and 12% interest. The first lender stopped communicating with me even after I said I was fine with the structure, I just never heard back from him. I ended going with the second lender due to a time crunch and no other options. About 2 months in I have since refinanced with a local bank which has also included the rehab costs in the loan at much cheaper rates. If I would have known the local bank would have been that much cheaper and quicker, I would have went that route first and saved about 6k.
@Garrett A. Van Allen - I haven't had any bad experience with HML lenders. But if someone is lending me 100% of the loan with 0% down just the closing costs out of my pocket, that too on my very first deal, I would think that to be too good to be true. I have no problem putting down the additional 20%, since I will be owning 20% of the equity in the house.
Also, are are suggesting its a non-recourse loan that you offer? So lets say you invest $150K in a project (property + rehab) and I am not able to flip it and you take it from me by means of foreclosure, and you are only able to flip it for $125K, are you suggesting I am off the hook for $25K? Is that the risk you are willing to take? To offset the risk you are not even charging anything outside of the norms for interest rate, and your points are even lower..
Sorry to be cynical, but that sounds a little too good...
What ever you do for financing make sure your numbers are solid. It is really easy to go guns a blazing and the, "what stops people..." can be misleading. Based on your description you are a hardworking reasonable person with a high credit score. If this goes south, it is going to tip you over. I would be willing to pay more and borrow as an LLC with no recourse. That means you lose your down and the house, but you will survive.
Everything I have read and learned indicates that it is a wise idea to flip houses under your LLC name as a precaution against lawsuits. Will a HML allow this with a personal guarantee? Does the personal guarantee destroy any protection against a lawsuit?
Everything I have read and learned indicates that it is a wise idea to flip houses under your LLC name as a precaution against lawsuits. Will a HML allow this with a personal guarantee? Does the personal guarantee destroy any protection against a lawsuit?
Most HML lenders in fact only lend to LLCs with personal guarantee. When you personally guarantee anything the plaintiff can come after your personal assets.
I'm assuming you also buy liability insurance in addition to property insurance to protect against a potential lawsuit? I am not worried about defaulting a loan, I am more worried about someone coming back at us for something done at the property that we did not have knowledge of or a contractor's craftsmanship... something to that effect. I like to cover my bases when it is possible.
I'm assuming you also buy liability insurance in addition to property insurance to protect against a potential lawsuit? I am not worried about defaulting a loan, I am more worried about someone coming back at us for something done at the property that we did not have knowledge of or a contractor's craftsmanship... something to that effect. I like to cover my bases when it is possible.
Understood, and thanks for clarification. Yes, you would need liability insurance. In fact my HML checks to see if there is adequate coverage should someone sue you say if they slip and fall and break their arm and leg. They would not move forward unless there is coverage. Remember, they are putting 80% down, you are only 20% down. They have more to lose than you.
Now, I remember you saying that your husband has contracting background, but in case you hire a good GC, he will have his own insurance as well.
@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...
This is sage advice.
I work with/for a HML and would not only reject your application immediately, but I would counsel you against this course of action for a variety of reasons.
I would have a hard time approving this plan for someone who was experienced, let alone new to the space.
If we go through a bank, can we have the home purchased using our LLC name with us as the PG?
Oh ya!!! Good luck with banks loaning to LLC.
You seem to really enjoy trolling but haven't offered much in the way of good advice lol.
I know this is an old posting, but in Chinmay's defense, Danielle, while he is being a bit flippant and dismissive, his original post suggested you NOT do this. You pressed on, so it became saucier. But I've often recognized in forums that people who are confident, while also being somewhat obnoxious, are quite often spot on.
It may behoove you to see past the attitude, which from the outside looking in, isn't that bad, especiailly since he's trying to protect you.
Great thread...good advice all around.
@Chinmay J. who are you using for an HML?
Great thread...good advice all around.
@Chinmay J. who are you using for an HML?
There are local guys I use, but I have also had (and many on this site has) experience with Realty Shares, which provides funding all over the country (I think). Check them out. They are reliable and are/were official sponsors of BP Podcasts.
@Danielle C. I think in this situation I'd stick to a conventional mortgage. Save up the downpayment and possibly borrow from family members. Finance repairs with a combination of CC and HELOC. Get a GC (help mitigate doing anything improper) and negotiate to do as much of the labor as possible. Your carrying costs on the conventional mortgage will be way less than HML without the pressure of the balloon payment. Also you could decide to rent the property out and refi out the equity gain when you are done or sell. Another thing, as nice as it is to save money by being your own realtor but established ones already have a network of buyers, know how to market and turn properties. Same w/ the GC. Just my 2 cents.
The idea of being an investor is to NOT go the traditional route (bank mortgage over 30 years).
I quit my job, got into REI fulltime, and within 3-4 months had 3 fix and flip properties on the go. Can't 'qualify' for a bank loan, no job. Did I use my own money? Well, if I had used my own money on the first one, how would I fund the second and third ones? We did JV (to share resources), but used Hard money, absolutely! My 'skin' in the game was 2-4% down payment with the lenders (10.5-15.5% interest) for purchase, credit cards/lines for renos, fix them, sell them, pay off the credit cards, lenders get their money from the sale and on to the next ones.
If your flipping, it's all about speed. Banks are NOT our friends and they are not going to make YOU rich. Use Hard/Private/B Lending whenever possible. Make sure you run the interest numbers in your formulas and there is no problem whatsoever.
If you are holding long term, a bank may be the better solution, but you will probably need private/own money to start the deal rolling. Run (and re-run your numbers, get a good 20%+ Cap Rate, get PM and on to the next one).
The best advice I can (and do) give to new investors, is simply 'jump in' and get started. There is lots of good advice here and online, take a 'guru' course (I did, no regrets whatsever), line up private money and resources, get all your licences, etc, but all that is useless without action. You will make mistakes (and recover), you will form partnerships and most of all you will gain the confidence to do it over and over again. Above all, have fun doing it and keep us posted!
Real estate investing is not fast money when your broke. Do a couple subject to deals maybe wholesale put some cash together then have the down payments. Good luck..nothing is for free..
I am looking to do my first deal with a hard money lender and hoping someone can help me...
I only deal with either extensive additions or tear down/ new construction
1) Lender is asking me to provide scope of work with line item breakdown. However, since I am going to the lender before I put a bid in one the property (what is the purpose of putting a bid in on the property if lender won't approve) and I have no architectural plans yet obviously how can this be accurate? In addition, how can I expect my contractor to take the time to provide all these line item breakdowns when it might take me 10-15 bids to get one place?
2) When presenting a HML deal in an official MLS offer how do you do it? I check the box for financing and then there is an OTHER box (do you write in private money or hard money etc in here)?
3) Do you keep your financing, appraisal and inspection contingencies with a HML offer?
Thank you to everyone for helping me out with these 3 questions I am stumped with!
I just want to put in a good word for some HML's out there. We have two that we have worked with: one in Redding, CA and one in Boise, ID. Both are great. We generally have to put 25% down (which is the drawback), but we're not paying any points and we're only paying 10% interest (I say 'only' because some people throw out numbers like 14-15% or more). Granted, we have cash reserves, but their terms are worthwhile for flipping as we don't hold the property very long. The biggest benefit we have seen in using hard money is our ability to be more competitive in our very competitive CA market. We still can't compete with all-cash investors, but hard money is a close second because we can close so quickly (7-10 days in most cases.) This gives us a real advantage over bank loans and the application process is much, much quicker. When you're making a lot of offers and doing a lot of transactions, time is money. Yes, we're paying more in interest but when you're holding a property for less than 4 months, it doesn't make a huge difference (note: we are buying at the lower end of the housing market - not multi-million $ homes where a couple of months and higher interest could, indeed, make a big difference) That said, not all hard money lenders are created equal for sure (and they don't all charge points, either!) But don't be scared away entirely. Keep looking for one that comes well recommended and offers terms that are right for you. Many, many investors start with HELOCs or by refinancing their current home to pull out their equity to get started. Many use credit cards. These methods have worked for a lot of people and many of us have to get creative if there's no rich Uncle in the family. Whatever method you choose, it all comes down to your individual ability to manage your money. Based on your credit scores it sounds like you're pretty good with your money. You have to decide what method works best for you and then take the plunge. As long as you buy right (make your money going in) you'll be as safe as anyone can be. There are no guarantees and real estate investing is not for the weak hearted but you've armed yourself with a lot of education and that counts for something.
I know you posted this a year ago, but any chance you could share the name of the CA HML who lends at 10% with no points?