Hard Money Lending and Creative Financing in the BRRRR Calc

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Hard Money Lending and Creative Financing in the BRRRR Calc

Rob Krin
Investor · Marlboro, NJ · Member since 2016 · 34 posts · 18 votes

Hi All

Hopefully you can follow along with me on my journey here.

I'm feeling the analysis paralysis creep upon me now.  I've now changed my mind on my approach and pivoted my strategy several times so I'm getting worried I might be over analyzing.  Or am I taking the right steps?

Regardless, I'm looking at some financing options for my first buy and hold.  First I thought cheap properties so no problem with me financing them myself.

Then I thought there is no long term sustainability in cheaper properties.

Then I looked at more expensive markets and started evaluating turnkey providers.  This is working out well, just trying to make my #s work.

Then on sidebar, I thought about corporate structure for the corporation.... I don't have yet. After speaking with my accountant and several investors, I got that nailed for the short term. LLC then figure the rest out later.

Now, all that behind me I'm trying to figure out where to find the money to fund my project. I can use my money, take a loan against my 401k, or HELOC against my house or against my only investment property. I need to find the balance my family is comfortable with.

Now, long story short I started thinking about hard money lenders.  Thinking if I borrow 70% for property and rehab then refinance after 6-9 months, I can pay back the loan with equity instantly built.  What fees do I need to know about? How is interest calculated?  Would it be loan x 12% (eg 100k loan + 12% = $112k back to lender?).

Any insights, advice, direction, comments, thoughts, feedback, wisdom, perceptions or sagaciousness would be greatly appreciated.

Regards, 

Rob

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Philip Pape
Investor · Bloomfield, CT · Member since 2016 · 86 posts · 25 votes
10y

Hi @Rob Krin, although I am a new investor myself, I've spoken to a few hard money lenders. I suggest reaching out and talking to a few directly as a first step; they'll tell you exactly what their terms are.

I believe most HML lenders offer 6-18 month terms, interest only, with balloon payment at the end. Plus there are points up-front. For example, a local lender offers terms of 20% down, 10-12% rate, interest-only, with 3-4 points up-front.

So on a $125K deal (that's purchase + rehab) with 20% down ($25K), you'll borrow $100K. At 12%, that's $1K per month PLUS up-front points of, say, 4% ($4K). Yes, it can get expensive but options are also limited for newer investors, so you really have to see if the numbers work.

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  • Philip Pape
    Investor · Bloomfield, CT · Member since 2016 · 86 posts · 25 votes
    10y

    Hi @Rob Krin, although I am a new investor myself, I've spoken to a few hard money lenders. I suggest reaching out and talking to a few directly as a first step; they'll tell you exactly what their terms are.

    I believe most HML lenders offer 6-18 month terms, interest only, with balloon payment at the end. Plus there are points up-front. For example, a local lender offers terms of 20% down, 10-12% rate, interest-only, with 3-4 points up-front.

    So on a $125K deal (that's purchase + rehab) with 20% down ($25K), you'll borrow $100K. At 12%, that's $1K per month PLUS up-front points of, say, 4% ($4K). Yes, it can get expensive but options are also limited for newer investors, so you really have to see if the numbers work.

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  • Timothy Maloney
    Lender · Syracuse, NY · Member since 2016 · 165 posts · 92 votes
    10y

    Rob,

    Our hard money guys charge 12% interest only while in repayment.   Figure max of 75% of purchase price + 2-4 points at closing.  

    As an alternative, but far more "expensive", consider a highly leveraged bridge for investors like yourself. 90% of purchase + 90% of rehab costs (so long at combined loan is less than 70% of ARV) at 10-12% interest. Sound too good to be true? It isn't - It's just high origination fees.

    At the end of the rehab you have *presumably* created some equity and you can roll into a long term fixed 25 year AM at XX% interest.  

    Message me with 4 pieces of info and I'll give you exactly what it will cost : Purchase price, Rehab budget, Expected ARV, and your estimated FICO.

    Here is a generic scenario for YOU - assuming 700 FICO. You want to fix N hold a home for $35000 purchase. You have a $15000 rehab budget and the ARV will be $79,000. You'll need 10% down ($3,500) 10% of rehab you pay ($1,500) plus 6 interest only payments of $374.63 = $2,247.78 plus closing/origination fee of $2,900 - $3,800. So for $12,547 total you can rehab that house. Obviously this does not include your carrying costs.

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  • Rob Krin
    OP
    Investor · Marlboro, NJ · Member since 2016 · 34 posts · 18 votes
    10y

    @Philip Pape makes sense.  Thank you.  Those are the types of # I've been trying to understand.  Hopefully If I'm cashflowing the right amount (+potential appreciation), it will make up for those costs long term.  So, how do I feature that in the BRRRR calculator? I've attached a deal (you'll need to zoom in to read) I was thinking about with those same assumptions.  These #s dont seem to work - am I doing something incorrectly?

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  • Philip Pape
    Investor · Bloomfield, CT · Member since 2016 · 86 posts · 25 votes
    10y

    @Rob Krin, looking at your BRRRR calculator output, I noticed a few things:

    You need to enter a down payment (currently shows as $0 under Acquisition) to reduce the amount financed up-front.

    More importantly, you probably didn't select INTEREST-ONLY for the acquisition financing. Your monthly payment from day 1 is a whopping $4,991.08 but should be under $600.

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  • Mark Senecal
    Specialist · Piscataway, NJ · Member since 2016 · 65 posts · 25 votes
    10y

    I was talking to a hard money lender at a REIA Meeting in New Jersey.

    He was saying around here they are all about 14% and 4 points.

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  • Rob Krin
    OP
    Investor · Marlboro, NJ · Member since 2016 · 34 posts · 18 votes
    10y
    Originally posted by @Philip Pape:

    @Rob Krin, looking at your BRRRR calculator output, I noticed a few things:

    You need to enter a down payment (currently shows as $0 under Acquisition) to reduce the amount financed up-front.

    More importantly, you probably didn't select INTEREST-ONLY for the acquisition financing. Your monthly payment from day 1 is a whopping $4,991.08 but should be under $600.

     Many thanks for taking the time to review.  I made the changes and the #s look better but not great. High interest and points really throw it all out of whack.  I'll keep digging through.  

    1Reply
  • Darren SagerPro Member
    Investor · Tampa, FL · Member since 2013 · 2k+ posts · 1k+ votes
    10y

    Hard money rates and points vary depending upon the risk you are to that lender.  First time investors with little or no experience are going to pay a higher % interest rates and higher points.  Experienced investors will pay on the lower end and less to no points, all depending on their track record of success.  

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