How Do I utilize a Hard Money Lender and How much do I need Saved

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So I am still in the planning stages of getting my First Plex. I found a Triplex for $75000 that is a 6 bedroom 3 bathroom 2121 sq feet on a 1-acre lot with long term tenants in place. I plan on making a deal in April of this year. By then I should have 2600$ saved up and will be able to pull another 3000 from my 401K plus about 1000 from my Tax refund. So I should have about 6600$. I am considering using a Hard Money lender to purchase the initial property. I want to employ the Brrrr Strategy and do a live in house hack. What do I need for a down payment on a Hard money loan for a 75K house? Will I have enough or will I need more? Or should I instead use an FHA 3.5% Down loan? When I contacted a lender they said I was preapproved for a 3.5 % FHA loan but would need 11K down to cover the DP and closing costs. The property is in Central NY.

I remember being nervous the first time I called a HML. But then I listened to Brandon talk about lenders and he said something along the lines of, they want to lend their money. It reassured me and I picked up the phone with a list of questions in front of me and I called them.
There is a list of HML on BP. Pick up the phone and talk to a local HML and they will answer all of your questions. They all vary. I here on the podcasts all the time that you have to have a Down payment but my HML doesn’t. His interest is 12.75%, fees are $75. And charges a 1.5% fee if paid off before 12 months.

I currently using a hard money lender to flip a house in Philadelphia.

You will need to know the numbers on the house before calling a hard money lender.

Do you know how much the house will appraise for after the renovations, the cost of the renovations and timeframe?

Most hard money lenders will give you 60% to 80% ARV depending on the area and your experience. They will lend all of the renovation costs and a portion of the purchase

In my case I got 65% ARV. So on a $65k house i had to bring about $20k at closing.

with that amount of money, i would just go right to FHA, get sellers concessions to cover all or most of closing costs. you can probably close for 5k.

I have realized that no two hard money lenders are alike. They all have their pros and cons. For a new and inexperienced flipper, you are probably looking at 3-4% points which are usually payable at the closing. In addition, you will be charged approximately 11-14% interest per year. Some have prepayment penalties and some do not. Some require you to at least utilize the funds for 6 months and others don't care. As @Prashant P. stated, most lenders will loan 60-80% of the ARV. It all depends on your experience and the HML. Most of the time, they will loan 100% of the renovation costs. However, these funds will be distributed through draws. You will need to provide a clear draw schedule to the HML. You will be required to pay for materials and labor out of pocket and then submit a draw request to the HML. The HML will send an inspector to your property to verify the renovations according to the draw schedule. If all looks good, they will send you payment within 24-48 hours. This will usually cost you approximately $150 per draw since someone will come out to verify the work that was conducted. If you are planning to do the work yourself, most HMLs will require that you have your home repair contractor license. Just some food for thought...Good luck!

Thank you for the information. I am still trying to decide how I will proceed if I should go with a hard money lender to just FHA? I think I am going to wait a little longer and continue to save up and then check into an FHA. If that falls through then ill have to consider the hard money lender.

@Christopher Andrews Have you been able to decide how to move forward yet? You mentioned an FHA loan before and wondered if you were thinking about the 203K FHA loan?

@Christopher Andrews I think the key piece here is "I plan to live in". In general, HML's don't loan to owner occupied. The FHA is probably the best strategy, with the seller concessions to lower closing costs.

Ideally you should have more reserves above that, as you're renting the other units.  The rental business can be an expensive sometimes.  

Good luck!

- Tom

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