Private money lenders

10 Replies

Does anyone know any investor friendly private money lenders in the Montgomery county or the Philadelphia area. I am looking to start on my first real estate property. Due to my age of 21 and not having enough assets and only a 700 credit score it's been an extreme headache to get financing for purchasing a property as well as rehab costs. I work for a property preservation company and have a construction background so most of the rehab will be done by me and I have great relationships with subs. but financial is the issue. How did you finance your first deal? What investors have you used in the area or others that work with newer investors. I want to do flips as well as rentals if the numbers work and they cash flow well. any advice ? 

Thanks in advance (: 

Charles Kappe 

Do you own a house? If not, you should house hack your first place. Go FHA 203k and, once it's done, you should have a nice chunk of equity to put towards your next project.

If that's not feasible, get a partner. If you can't find a partner with credit and/or cash, your next best bet is going to be family or friends. If you're looking at hard money, it's brutal and will likely eat up a fair amount (or ALL) of your profits. I've used it once before and it turned my $12k profit into $5k on a wholetail. I was young and dumb and didn't know what "points at closing" were. I found out real quick...

If you go FHA 203k, you should also go MFH and you'll have equity to parlay and tenants to pay your mortgage. It doesn't get any better than that my friend.

@Charles Kappe  As @Troy S.  said, hard money is definitely expensive, so you need to check and double check your math to make sure it works. If it were an option I would do as Troy said and house hack my way into a quad, but my fiancee won't move...so that's out of the question for me! So I settled on hard money.

There are some pros to using hard money - but it's definitely expensive. Just to give you some numbers on a deal I'm doing now their closing costs are just around $10k. Some lenders will roll those into the loan, some won't. So if you don't have ANY money, the strategy may not work for you. There is one that I'm working with that WILL roll the money into the loan, but they require some form of cross collateral (ie. they put a lien on another property - if you don't have one with sufficient equity - they require you to hold money in an escrow account that's released at the end of the deal).

The other part of it is they're usually more stringent than flippers - the majority that I'm qualified for will only lend up to 65% of the ARV - so unless you've good a hot deal you're still out of pocket money.

With all that said, they still have their benefits (hence me working with them), but once I've got sufficient cash to do my own deals, I'm cutting them out.

If you STILL want some lenders - PM me and I'll refer one or two.

Originally posted by @Troy S. : If you're looking at hard money, it's brutal and will likely eat up a fair amount (or ALL) of your profits. I've used it once before and it turned my $12k profit into $5k on a wholetail. I was young and dumb and didn't know what "points at closing" were. I found out real quick...

It sounds like those hard money lenders really worked you over. Tell me what were your other options? Bank loan? Not likely or you would have gone that route. Personal funds, friends, family? You could have decided not to do the deal. The lender took a chance on you and loaned you funds when no one else would. You did the deal and put $5K in your pocket. You now have some more experience and can talk about your profitable deal. You are probably in a much better position to attract other lenders now. Sounds to me that you and your lending partner both had good outcomes.

Originally posted by @Jeff Rabinowitz :
Originally posted by @Troy S.: If you're looking at hard money, it's brutal and will likely eat up a fair amount (or ALL) of your profits. I've used it once before and it turned my $12k profit into $5k on a wholetail. I was young and dumb and didn't know what "points at closing" were. I found out real quick...

Tell me what were your other options? Bank loan? Not likely or you would have gone that route. Personal funds, friends, family? You could have decided not to do the deal. The lender took a chance on you and loaned you funds when no one else would. You did the deal and put $5K in your pocket. You now have some more experience and can talk about your profitable deal. You are probably in a much better position to attract other lenders now. Sounds to me that you and your lending partner both had good outcomes.

I had excellent credit but didn't have the 20% needed to get into the property via conventional. As stated, I was young and dumb; if I'd have known or bothered to try and figure out what points at closing were, I would have gone a different route. The place was a wholetail, it needed a good cleaning and a new water heater, all of which I did before I owned it. It was a HUD foreclosure; I did the work, pulled down the HUD signs, put up my own signs and had it under contract to sell before I owned it. I didn't know that was illegal till HUD called me, the property management people came by to cut the grass and thought the place had been sold and they shouldn't be there, so the agent on the phone was less than thrilled with me. They threatened to cancel my contract, keep the EMD, and ban me for life from bidding on HUD properties. It all worked out but I'd say the HML had a better outcome than I did :)

This was nearly 20 years ago and I'm not bitter, but I do think they should do a better job of educating the consumer, especially when they're 20-somethings who have done very few RE transactions before. I think this was my 2nd RE purchase ever. My reason for posting was not to malign HML's, it was to warn the OP about the cost and to be sure he knew what he was getting into. I didn't!!!

@Troy S. , thanks for sharing your story. It confirms what I suspected. You made a $5K profit that you would not have made if you did not take action and/or the HML did not loan you the funds. The HML made more than you did on the deal. (They also had more at risk.) So what? You made $5k, which I suspect was a good chunk of change to you at the time, and, perhaps more importantly, you gained some valuable experience by getting out of a potentially problematic situation with money in your pocket. I also suspect you are a much better investor for having had the experience. It is a lot better than dropping $5K on a Rich Dad sellinar and gaining just about nothing.

The terms of your loan were probably spelled out in your documents. (There have been slimy lenders who may try to hide terms, and there are probably still some but, fortunately, most of them did not survive the last crash and the penalties for unethical lending are much worse now then they were 20 years ago.) Granted, you may not have understood the terms completely but you do now. That was part of the education. I would bet that gaining this experience at a young age had positive affects on your life. I know it would have affected me greatly if I had started as young as you did.

So,yes, there is a cost to borrowing money and it may be many thousands of dollars. However, if you need the funds for your deal and you are well compensated why worry about what the other guy is making? I have done deals where the wholesaler who brought me a property earned thousands of dollars up front when they were involved in the deal for a couple weeks and had no money at risk while it took nearly a year and an investment of several hundred thousand dollars before I put my profit in my pocket--and I would do those deals again whenever they present.

@Jeff Rabinowitz  That's exactly what I'm saying. It's expensive - but it's good education (for a variety of reasons) and it allows for deals you wouldn't otherwise been able to get - even if they aren't as good if you could do them with a cheaper option.

But before you pull the trigger, you need to do your due dilligence.

You're belaboring the point that I made money. I'm not arguing that. My point is, I had other options other than HM, I just didn't know enough, or wasn't smart enough, to find out what they were and, the OP is in a similar situation as I was. I'm simply trying to warn him of the pitfalls of HML. When you're inexperienced and anxious to do a deal like I was, it can seem like a godsend and it's easy to ignore 7 points at closing. "Hey, I'm an investor, I'm doing a deal! Points?! Sounds good!"

IMHO, you need a screaming good deal to use HM, which most newer investors aren't likely to find. I'm also not "jealous" about the HML making more than me, that's your assumption. My point, once again, is, they take big bites of your pie and if you're not aware of just how big that bite is AND you underestimate something, you'll be left with the empty pie plate and a bill.

Are you an aspiring HML @Jeff Rabinowitz ? You're vigorously defending HML's to the point that I'd think you have aspirations to become one and I'm besmirching your future career path. I'm sure @Charles Kappe  would appreciate some actionable advice from you on his question, which you haven't addressed...

Originally posted by @John Matthews :

@Jeff Rabinowitz  That's exactly what I'm saying. It's expensive - but it's good education (for a variety of reasons) and it allows for deals you wouldn't otherwise been able to get - even if they aren't as good if you could do them with a cheaper option.

But before you pull the trigger, you need to do your due dilligence.

I don't disagree. Your last sentence is what I'm saying, obviously poorly. As a newer, 22 year old investor, it's easy to get anxious and pull the trigger on a marginal deal. Couple that with any one of the dozens of mistakes it's all too easy to make for new and seasoned REI's alike, and it could be disastrous. Know what points are. Know what the interest rate is and what that's going to look like to pay every month along with your other holding costs. That's all I'm saying.

I have funded and continue to fund projects for several partners. I do well and they do better. I have done it a couple of times but I am very reluctant to work with new investors. As you say, it would have to be a screaming deal for me to risk an inexperienced rehabber screwing it up. It is not that hard for a newbie to turn a $150K home into a $100K home.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.