Words of caution for new investors using hard money lenders?

9 Replies

Wanted to get input from experienced investors in the BP community that have used hard money in the past as part of a BRRRR investment. I have a couple questions that I am hoping the community could help answer!

- What major benefits have you found from using hard money?

- What pitfalls should investors be aware of when using hard money lenders?

- Is there any insights you've gained using hard money lenders that would be useful for a new investor to know?

I bought my first property with a HM loan, first advice I could give is really have your rehab numbers dialed. You should have a pretty clear picture of what needs to get done and how much it’s going to cost. If you don’t know, get quotes. The more you have these prepped, the faster you can close. 

Second, HM lenders vary quite a bit on their rates. Call around, I spoke with 7 before I found the company I ended up going with. 

Third, they won't lend on everything. General rule is the primary loan amount + rehab cost should be <75% of the ARV. You'll be hard pressed to find a lender who will go above that. If you can't find a property that fits that you may need to pony more $$$ upfront.

Last (for now): your rehab budget will likely be distributed in draws that you set up in advance with the lender. So the order goes: contractor does the work > you pay your contractor > HM lender inspects the property to see the work is done > you get reimbursed for the rehab done. This means you’ll need a slush fund to pay your contractors. If you tell your contractor they’ll get paid when you get your draw, you’re not going to have a whole lot of contractors who want to work for you on your next project  

Any other questions, feel free to ask :)

@Matt Hurley Thanks for all the great information! It sounds like the major key (or one major key) is to make sure you purchase the property far below the ARV. That's definitely good to know as I analyze more deals going forward!

@Matt Hurley great stuff by the way. I am currently pre approved with a HMLthat part where they have inspect the roof then reimburse my account is a step I'm on the fence about. On top of getting my budget together my lender adviced me that 200 would be taking out each time for each inspection I work a full time job.  Just seems very time consuming opposed to me raising the funds for rehab and paying the contractor myself.

@Dante Foreman I definitely hear that. In that case, I would highly recommend looking into 0% APR business cards! Depending on your credit score, you could get approved on a much higher amount then on a personal credit card. So, charge rehab to card > house inspected > receive draw > pay off credit card > rinse repeat. I did that with both my roof ($20k) and the knob and tube replacement on the same property ($10k).

@Matt Hurley Thanks for the information! Are the 0% APR business cards you referred to being used in tandem with hard money lending? I assume that's what you are referring to when you mention "receive draw". Are there scenarios where the hard money lender would not provide the draw? If so, how is this risk mitigated?

@Cody Richard Yes, being used in tandem. As in, the credit card is your slush fund to pay your contractors with instead of cash. Then get the property inspected, receive your draw, pay off the credit card, repeat the process. The only situation when you would not receive a draw from your lender is if you straight up lied about your rehab, did the work yourself, or didn't complete the work at all. 

The lender will almost always inspect the property to determine that the repairs you said were completed actually happened. Additionally, most will make you submit receipts of how much you paid for the services. You cannot do a repair yourself and submit a bill to the lender for market rates. For example, I did all the demo work on my recent project. 55 hours of pulling plaster and lathe off the walls and loading it into a dumpster. Normally a $10k job to pay a demo company to do. The only reimbursement I could submit for was the $300 rental of the dumpster and the purchase of a special shop vac that could suck up lead dust.