Flipper/Rehabber · Johns Creek, GA · Member since 2017 · 28 posts · 6 votes
Hi there! My fiance is ready to emabark on his first fix and flip, and he's looking at a Hard Money Loan with Lending Home to finance the purchase and renovation.
As you all know, these HML loans come with a hefty down payment requirement. He has great credit, so obtaining a loan for the down payment and fees (~$20k in this case) would not be a problem, and it's an enticing option considering that the HML lender doesn't really care about credit and DTI ratios. We would also use the personal loan to pay the holding costs during the renovation. Our plan would be to repay the personal loan once the deal is complete, of course. He has enough money to fund the down payment from savings, 401(k) etc., but we don't want to dip into our emergency funds on this first venture.
Has anyone ever utilized a personal loan, along side a HML, to get through your fin and flip project? Does anyone have any other suggestions? Any advice would be greatly appreciated. Thanks!
Real Estate Broker · Marietta, GA · Member since 2014 · 135 posts · 105 votes
8y
@Sharon Evans You are venturing into dangerous waters with over leveraging yourself on a deal like this. I've seen people loose money doing this exact thing but haven't seen many make money on it. Here are a couple of things to just consider before you jump in.
1. You are looking at a personal line of credit for the down payment. Since this is an unsecured line of credit, the rates won't be cheap. Cross collateralization is common but unsecured lines are expensive and risky.
2. You need a way to pay for the renovations during the draw periods. A HML will want to see the work in a given stage is complete before disbursing that draw. Be prepared to pay for Materials and Labor out of pocket and then get reimbursed.
3. You will always find something unexpected in a renovation or build, driving up your renovation and holding costs. Not accounting for this is a huge risk.
What you want to do can be done but I've heard this song before. Flipping houses is not a risk-free endeavor.
Real Estate Agent · Atlanta, GA · Member since 2017 · 48 posts · 42 votes
8y
Hi @Sharon Evans ! You said a lot without saying some things. First, you said "your fiance" is ready to embark on "his" first F&F. Then you switch to "we" when talking about the personal loan and repayment. Not playing English teacher, however, if you are cautious, nervous and quietly resisting, I'd suggest you keep your money out of this deal. This is a high risk/high reward venture and the flipping shows make it all seem so fun and easy.
I would consider seeking other HMLs and properties that may reduce the cash you need to close. I can't disagree with @Eric Adobo . Plenty of money is lost in these deals.
Now that we got the negative out of the way. If you/your fiance are comfortable with the risk of a flip, I would say try to use your own money rather than overleveraging the property. With such a high amount of loans against a property (100%), your margins may not be able to handle a price cut, if necessary.
Flipper/Rehabber · Johns Creek, GA · Member since 2017 · 28 posts · 6 votes
8y
@Nick Fitzpatrick thanks for the speedy reply! You touched a some points that I'm currently in the process of researching, so I appreciate your insights.
I need to do more research, but I believe some HML, like Lendinghome, have an option for draw requests, but I have to ask more questions to be 100% certain. Also, we're looking into contractors who are willing to work with renovation loans and will, hopefully, take payment directly from the lender at the time of draw. I recently learned that LOWES offers whole home renovation services, and after talking with a project manager we learned that they will accept payments at the time of draw. So that's one plus, but I think we may need other contractors, so we're working on that piece of the equation. In Chicago, it's common for contractors to work this way, but I'm not sure how that works here in ATL.
Do you have any recommendations for lenders who specialize in renovation loans, or other reputable HMLs?
Real Estate Broker · Marietta, GA · Member since 2014 · 135 posts · 105 votes
8y
@Sharon Evans Unfortunately I don't have any HML recommendations for a first timer. BiggerPockets has a large network of investors who have used them here locally so I would verify with a few other members before deciding on one.
Real Estate Broker · Atlanta, GA · Member since 2017 · 229 posts · 145 votes
8y
Hi, Sharon. I wanted to put in my two cents, but I think the posters above covered the main points very well. I think you're setting yourself up for failure and being over-leveraged.
I think you need to step back and consider your budgeting and planning to be fine in terms of the worst-case scenario and not the best-case scenario. For weighing your options and doing the math, consider a personal line of credit from your bank (I got $40k at 10% and it was as easy as buying a used car) and also consider a 401k loan (I did this for $50 fee in 10 minutes and got 4% interest), versus a draw. These can be options to avoid dealing with HML fairly-annoying draw requirements and interest rates can be much more favorable.
Flipper/Rehabber · Johns Creek, GA · Member since 2017 · 28 posts · 6 votes
8y
@Kelly Rambo thanks for your insights! To clarify, this will be HIS deal. I've done flips before in Chicago, but this will be his deal, his capital. Let's just say that I'm the brains and he's the brawn (and the money), LOL.
I agree that we don't want to over-leverage, which is why I was curious if there has been success doing it this way from anyone in the investing community. My past deals were all FHA 203k (my first deal), and conventional. However, aside from my first rehab with the 203k, my conventional loan deals were all on fully occupied multi-unit properties that needed very little repair, so aside from using an FHA loan, I don't have any experience financing with a HML.
Just so I'm clear, you're saying that it may be better to get a conventional loan, and a personal loan for the rehab? If so, then that was, in fact, going to be my next question :) His credit is good, so there would be no problem qualifying for a conventional loan. Additionally, if we were to contract with LOWES for the renovation, they offer project financing that he would also qualify for (or we could do a personal loan for the renovation). In either case, I think we'd come out better than using a HML. We just don't want to dip into our savings to fund a 20% down payment.
Real Estate Broker · Atlanta, GA · Member since 2017 · 229 posts · 145 votes
8y
Yes, that's right. Of course, the best course of action would depend on many different factors. If you're talking about a "paint and carpet" situation, that's one thing and I think you're approach is fine with relatively high probability of success, assuming you know what you're doing and you're right about the condition. If you're talking about a "let's see what things look like when we gut the walls, peel the roof off, figure out where that water is coming from, figure out why this wall is falling down, evict all these damn squatters, etc.," it's a very different story.
Flipper/Rehabber · Johns Creek, GA · Member since 2017 · 28 posts · 6 votes
8y
@Nicholas LaGatta Thanks! That's the clarity I was looking for :) There are so many options, and so many potential outcomes in this business. It's nice to have a sounding board to bounce ideas around from time to time.
Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
8y
@Sharon Evans Yes, I did what you were proposing about 4 years ago for a high end fix and flip deal. I used 100% financing (HML, Friends and Family). Things didn't go as planned and I used up most of my own reserves before I got out of the property and the bleeding stopped. Luckily, my friends were cool, I had other properties, and I was able to pay them all back within 18 months.
Things I learned:
1. Much better to take on equity partners then debt partners in these situations. Sure, you give up more profit but you limit your downside. (Just in case you don't know, equity partners take a percentage of the profits but also share in losses; debt partners get their interest payments which are usually a lot less than the profit but they expect to get paid back first and to 100% in case of profit or loss.)
2. Don't take high end projects unless you have the financial wherewithal to withstand bad case scenarios (different than worse case and more common) . I encountered a market slowdown and should have done more with the rehab. If I had the finances to rent the property out for a year and make some additional improvements, I would have come out way ahead.
For hard money lenders, I recommend Groundfloor. They don't require monthly payments. You pay a little bit upfront but the bulk is paid at the end when you close with your end retail buyer. I took out one loan with them and they were easy to work with. (Disclosure: I don't get any compensation for recommending them but I do own a small amount of stock in their company; I had a good experience borrowing from them and I like their business model so I invested in the company.)
Flipper/Rehabber · Johns Creek, GA · Member since 2017 · 28 posts · 6 votes
8y
Thanks @Andy Mirza! It's so funny because I was just looking at Groundfloor and Patch of Land :)
I should have mentioned that this first flip will definitely be in the low-mid range. Hopefully, we can find something that needs no more than $40-$50k in work. We're taking it slooooow, and don't want to gamble with our savings.
We gave it a shot. She hasn't heard a word we said.
Not sure what you mean. If you're reading the thread, I've heard all the advice. Maybe you're not reading my responses correctly? YOU haven't said anything constructive or in the way of advice.
Hi @Sharon Evans ! You said a lot without saying some things. First, you said "your fiance" is ready to embark on "his" first F&F. Then you switch to "we" when talking about the personal loan and repayment. Not playing English teacher, however, if you are cautious, nervous and quietly resisting, I'd suggest you keep your money out of this deal. This is a high risk/high reward venture and the flipping shows make it all seem so fun and easy.
I would consider seeking other HMLs and properties that may reduce the cash you need to close. I can't disagree with @Eric Adobo . Plenty of money is lost in these deals.
Now that we got the negative out of the way. If you/your fiance are comfortable with the risk of a flip, I would say try to use your own money rather than overleveraging the property. With such a high amount of loans against a property (100%), your margins may not be able to handle a price cut, if necessary.
Investor · Atlanta, GA · Member since 2015 · 139 posts · 98 votes
8y
It sounds like you're determined to do this deal, and that's to be applauded. Just be careful. Every deal has challenges, but typically deals that are forced are deals that will end badly. Let us know how it goes once you figure things out. This would make a good deal diary, actually.
Flipper/Rehabber · Johns Creek, GA · Member since 2017 · 28 posts · 6 votes
8y
@Stacey Paulin, not so much "determined" as I am curious and just seeking knowledge. I'm a strong believer in learning all the ins and outs of something so obscure, as many HMLs are, before diving in. My questions are more a reflection of my desire to understand the "Best Practices" and less of my stubbornness, LOL.
I have, however, searched the forum and found some very creative alternatives that will get the job done :)
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
8y
Just an observation, using places like Lowe’s and HD for renovations are the Most expensive “contractors” you could possibly find. Their mark ups will be much more than interest costs and using the contractors/subs you need to be using.
Flipper/Rehabber · Johns Creek, GA · Member since 2017 · 28 posts · 6 votes
8y
@Wayne Brooks, thanks for the heads up! I actually received a quote from them yesterday on a property and, surprisingly, they were about 26% less than 2 other quotes I received from local GCs. I was quite surprised myself, but apparently the savings come from the fact that they don't mark up the materials, since they're sourced directly from LOWES. The GCs were adding tremendous markup to the flooring, fixtures, lighting, etc.
Of course, they won't come out as the low bidder on larger projects, but they seem to be a viable option for small-midrange renovations.
Another benefit is that you don't have to worry about them paying their subs and needing the money in order to finish the job.
Developer · Atlanta, GA · Member since 2017 · 33 posts · 27 votes
8y
I think what Eric was alluding to was the idea your fiance was "ready" to embark on his first F&F yet he doesn't know the first thing about renovations or contracting (runs to a big box retailer for the entire project) and doesn't have a dime to put into this. (borrowing funds for down payment, closing costs AND debt service)
That means there are no capital reserves for permits, inspections, utilities, insurance, possibly property taxes and the always cropping up cost over runs. (Just wait till he hears from an inspector, "Sorry sir, you can't put this over here unless you move that, that and that over there.")
So many times we've seen guys with a truck and a hammer who watched one too many flip shows on HGTV over pay for a property, spend tons of money that does little to increase the value only to lose money or the house. Hope you are the anomaly and come out successful. Keep us posted.