Using hard money the first time

5 Replies

I am new to BP and I am currently looking for my first deal in northern Utah. I am also looking into ways to get the money, so my question: Would you suggest using a hard money lender for my first deal, or only when I have some more experience?

Originally posted by @Tim Hogg :
Would you suggest using a hard money lender for my first deal, or only when I have some more experience?

I'm assuming you're looking to do some rehabbing. How do you plan on purchasing properties if you don't use a HML? You may be able to find a commercial lender or conventional lender that will loan to you, but you need to have enough capital to put ~20% down and cover most/all of the rehab. If funds are tight, then a HML would be the way to go, as they will typically loan rehab costs as well. If you have a great deal to present to them and can convince them you'll get it done, you may not need the experience. The terms probably won't be as favorable as if you have 5+ rehabs under your belt though.

If you don't have the capital available to get traditional funds then HML would be the route to go...just remember you're going to have much shorter terms, higher interest costs and upfront costs added to loan as well. Typically HML for short term carrying for flips etc

@Tim Hogg As long as you have enough spread in the deal to cover your hard money loan costs you should be fine. In my market, I run my numbers with the anticipation that I'll have to pay 2 points and have 6 months of 12% interest only payments. That equates to 8% of purchase price (not ARV). If I can get the loan for less or turn the property around more quickly then I will end up with less hard money costs so that I have a bigger pad to cover other expenses.

I started out using a combination of "family and friends" money and hard money to get deals done. At the beginning, once you have a deal in contract, it becomes a scramble to scrape up the funds from wherever you can get them. It's part of the learning curve but I expect that it'll be easier and easier to raise funds the more experience you have and, ironically, the less you really need them.

Make sure your exit strategy is bullet proof. Have conventional lending in place for a refi to reconvey the HML or make sure your margins are big enough that you can discount it to sell quickly.

I would be very cautious on hard money for your first deal, particularly if it's a rehab. Lots of things go wrong for even the most experienced investors. With hard money you are adding greater timeline pressures.

That being said, I will look to hard money when there's a 50% equity position after rehab. (And these are pretty rare in Cache Valley).

Good luck!

The increased cost of using a HML as opposed to conventional is often discussed, but equally important is the shorter loan term. Most HM Lender that I have heard of have short term loans (6 months is pretty common) so you as mentioned, you need to have an exit strategy (and backup plan) in place. This is going to make the rehab schedule, marketing, and re-sale schedule critical.

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