Need Clarification...Can you do this? HML & MONEY

[Tyler Piciullo]

Let's say I found a deal. Hard Money Lender is requesting 20% down and will finance 80% of purchase price and 100% of the rehab. When it comes to the 20%, I heard that the HML wants to always stay in the first position and pretty much would like to be the only lien on the property. If I were to raise the 20% from friends & family with promissory notes guaranteed by the LLC is this possible?

[Jay Hinrichs]

sure.. if they are unsecured loans..  Most HML dont care where the equity comes from just that there is some equity.  Also check to see if you have to pay all the closing costs and points up front that can make your down payment go up by 5 to 10% . so you really need 25 to 30% down and then for draws.. Most will only let you draw for work in place after inspection.. So normally you need to front the rehab and get reimbursed so this can be another 10 to 30k per draw you need in cash ..

[Tyler Piciullo]

Thanks for the clarification. 

[Doug Smith]

As a lender, I can say that the answer is "it depends". If its an individual Hard Money Lender, then they usually don't care. An institutional Bridge/Rehab lender like us does need to "season" your down payment funds by gathering two months of bank statements. We really like to see the money in your account in that first statement. Anil-Money Laundering (AML) law require us to "source" the funds. The Feds assume you always get your cash from terrorism or drug sales I guess, but they make us do it...plus, statistics overwhelmingly show that if a borrower has no skin in the game themselves that the default rates is exponentially higher for the lender. That being said, you can also show the cash injection as a gift from a family member or someone close to you with a lot of lenders. I know that's not completely clear, but I hope it helps. Good luck to you. 

[Chris Seveney]

@Tyler Piciullo

You could do it, but would strongly advise against it. If you are financing 100% with loans in todays world margins are so tight how are you going to make any money and pay everyone back?

Remember your friends and family would get screwed first and they would have no priority over each other until one recorded the lien or filed suit.

[Tyler Piciullo]

Quote from @Jay Hinrichs:
sure.. if they are unsecured loans..  Most HML dont care where the equity comes from just that there is some equity.  Also check to see if you have to pay all the closing costs and points up front that can make your down payment go up by 5 to 10% . so you really need 25 to 30% down and then for draws.. Most will only let you draw for work in place after inspection.. So normally you need to front the rehab and get reimbursed so this can be another 10 to 30k per draw you need in cash ..

Ok so “money in the account” would that be 20% down + the rehab costs?

[Jay Hinrichs]

Quote from @Tyler Piciullo:

Quote from @Jay Hinrichs:
sure.. if they are unsecured loans..  Most HML dont care where the equity comes from just that there is some equity.  Also check to see if you have to pay all the closing costs and points up front that can make your down payment go up by 5 to 10% . so you really need 25 to 30% down and then for draws.. Most will only let you draw for work in place after inspection.. So normally you need to front the rehab and get reimbursed so this can be another 10 to 30k per draw you need in cash ..

Ok so “money in the account” would that be 20% down + the rehab costs?

typically lets lay it out for real here.

250k deal your buying..  HML wants 20% down = 50K

so they are lending you 200k..  they have points anywhere from 2 points to 10 points depending on lender etc.  so thats 4 to 20k you need to pay at close in points.. so lets just say 4 points  pretty common today..  thats 8k  now you have closing costs to third parties thats another 2k or so. Insurnace 1k and then lender junk fee's  admin doc review and any other way they can couch it that is normally 1k to 3k  on  top..   then U have to front the draws  lets say draws are going to come out at 20k per draw.

So cash needed to do a typical HML in todays market  for a 250k loan.

50k   DP
8k    Points
2k   3rd party closing costs
3k   Lender junk fee's which could include apprasial.
20k first draw  then U get reimbursed each draw
2k   per month for your payment @ 12% which is pretty common today many are higher So lets say its a 9 month start to finish you will need another 18k in payments.
2k  for utls law mowing etc.

Grand total to do a 250k HML would be about 98k in cash  plus some reserves for when the project goes over budget which is quite common.

So figure to do a 250k HML on a fix and flip you will need 100k in direct costs up front and 25k in reserves.

[Tyler Piciullo]

 How much of that 100K can I raise and still do the deal? @Jay Hinrichs

[Jay Hinrichs]

Quote from @Tyler Piciullo:

 How much of that 100K can I raise and still do the deal? @Jay Hinrichs

up to the lender but you will need it all so the lender knows you have the resources to carry through with the project so you dont run out of cash and it then becomes the lenders problem.

[Tyler Piciullo]

Quote from @Jay Hinrichs:

Quote from @Tyler Piciullo:

Quote from @Jay Hinrichs:
sure.. if they are unsecured loans..  Most HML dont care where the equity comes from just that there is some equity.  Also check to see if you have to pay all the closing costs and points up front that can make your down payment go up by 5 to 10% . so you really need 25 to 30% down and then for draws.. Most will only let you draw for work in place after inspection.. So normally you need to front the rehab and get reimbursed so this can be another 10 to 30k per draw you need in cash ..

Ok so “money in the account” would that be 20% down + the rehab costs?

typically lets lay it out for real here.

250k deal your buying..  HML wants 20% down = 50K

so they are lending you 200k..  they have points anywhere from 2 points to 10 points depending on lender etc.  so thats 4 to 20k you need to pay at close in points.. so lets just say 4 points  pretty common today..  thats 8k  now you have closing costs to third parties thats another 2k or so. Insurnace 1k and then lender junk fee's  admin doc review and any other way they can couch it that is normally 1k to 3k  on  top..   then U have to front the draws  lets say draws are going to come out at 20k per draw.

So cash needed to do a typical HML in todays market  for a 250k loan.

50k   DP
8k    Points
2k   3rd party closing costs
3k   Lender junk fee's which could include apprasial.
20k first draw  then U get reimbursed each draw
2k   per month for your payment @ 12% which is pretty common today many are higher So lets say its a 9 month start to finish you will need another 18k in payments.
2k  for utls law mowing etc.

Grand total to do a 250k HML would be about 98k in cash  plus some reserves for when the project goes over budget which is quite common.

So figure to do a 250k HML on a fix and flip you will need 100k in direct costs up front and 25k in reserves.

 I see. I mean hey when you put it like this then I am reading videos of "I did my first flip with $0 and all credit cards" or "I had 5K in my bank" it makes it seem very fishy lol...how do people even do that?

[Jay Hinrichs]

Quote from @Tyler Piciullo:

Quote from @Jay Hinrichs:

Quote from @Tyler Piciullo:

Quote from @Jay Hinrichs:
sure.. if they are unsecured loans..  Most HML dont care where the equity comes from just that there is some equity.  Also check to see if you have to pay all the closing costs and points up front that can make your down payment go up by 5 to 10% . so you really need 25 to 30% down and then for draws.. Most will only let you draw for work in place after inspection.. So normally you need to front the rehab and get reimbursed so this can be another 10 to 30k per draw you need in cash ..

Ok so “money in the account” would that be 20% down + the rehab costs?

typically lets lay it out for real here.

250k deal your buying..  HML wants 20% down = 50K

so they are lending you 200k..  they have points anywhere from 2 points to 10 points depending on lender etc.  so thats 4 to 20k you need to pay at close in points.. so lets just say 4 points  pretty common today..  thats 8k  now you have closing costs to third parties thats another 2k or so. Insurnace 1k and then lender junk fee's  admin doc review and any other way they can couch it that is normally 1k to 3k  on  top..   then U have to front the draws  lets say draws are going to come out at 20k per draw.

So cash needed to do a typical HML in todays market  for a 250k loan.

50k   DP
8k    Points
2k   3rd party closing costs
3k   Lender junk fee's which could include apprasial.
20k first draw  then U get reimbursed each draw
2k   per month for your payment @ 12% which is pretty common today many are higher So lets say its a 9 month start to finish you will need another 18k in payments.
2k  for utls law mowing etc.

Grand total to do a 250k HML would be about 98k in cash  plus some reserves for when the project goes over budget which is quite common.

So figure to do a 250k HML on a fix and flip you will need 100k in direct costs up front and 25k in reserves.

 I see. I mean hey when you put it like this then I am reading videos of "I did my first flip with $0 and all credit cards" or "I had 5K in my bank" it makes it seem very fishy lol...how do people even do that?

Money partner ..   off market sub too  or just plain  Puffing  Keep in mind there is 100% financing its all i do for my clients but we are JV partners I am the money they find the opportunities and execute the business plan.. Just like if you were going into partnership with a friend or relative. So for them it is no money out of packet..

I closed one last week for my Partner in Augusta GA..  went like this.

She is a very experienced agent and has rehab crews.. so check that box.

Starter home  that sold for 150k

I put up the 100k to buy and rehab.. she found it and did all the work.  She got a commish for buying it as well.  Then we split profits.. But she did not put up anything but her expereince and my partners have to pay the UTLS.. I cant be paying utls on 100 plus deals I have going at anyone time :)  She made over 25k plus commish and spun it in 75 days with ZERO of her own money and this is just one of 4 we have working and I am closing two more for her next 10 days .. bigger deals 150 to 225k each.. profits for her will be about the same 20 to 30k each.. I suspect with my money and her superior ability to find  rehab and resell she will make well above 250k with me as a partner for the year ALL WITH ONLY PAYING the Utilities  LOL.. so yes it happens we just dont talk about it on U tube.

[Tyler Piciullo]

Quote from @Jay Hinrichs:

Quote from @Tyler Piciullo:

Quote from @Jay Hinrichs:

Quote from @Tyler Piciullo:

Quote from @Jay Hinrichs:
sure.. if they are unsecured loans..  Most HML dont care where the equity comes from just that there is some equity.  Also check to see if you have to pay all the closing costs and points up front that can make your down payment go up by 5 to 10% . so you really need 25 to 30% down and then for draws.. Most will only let you draw for work in place after inspection.. So normally you need to front the rehab and get reimbursed so this can be another 10 to 30k per draw you need in cash ..

Ok so “money in the account” would that be 20% down + the rehab costs?

typically lets lay it out for real here.

250k deal your buying..  HML wants 20% down = 50K

so they are lending you 200k..  they have points anywhere from 2 points to 10 points depending on lender etc.  so thats 4 to 20k you need to pay at close in points.. so lets just say 4 points  pretty common today..  thats 8k  now you have closing costs to third parties thats another 2k or so. Insurnace 1k and then lender junk fee's  admin doc review and any other way they can couch it that is normally 1k to 3k  on  top..   then U have to front the draws  lets say draws are going to come out at 20k per draw.

So cash needed to do a typical HML in todays market  for a 250k loan.

50k   DP
8k    Points
2k   3rd party closing costs
3k   Lender junk fee's which could include apprasial.
20k first draw  then U get reimbursed each draw
2k   per month for your payment @ 12% which is pretty common today many are higher So lets say its a 9 month start to finish you will need another 18k in payments.
2k  for utls law mowing etc.

Grand total to do a 250k HML would be about 98k in cash  plus some reserves for when the project goes over budget which is quite common.

So figure to do a 250k HML on a fix and flip you will need 100k in direct costs up front and 25k in reserves.

 I see. I mean hey when you put it like this then I am reading videos of "I did my first flip with $0 and all credit cards" or "I had 5K in my bank" it makes it seem very fishy lol...how do people even do that?

Money partner ..   off market sub too  or just plain  Puffing  Keep in mind there is 100% financing its all i do for my clients but we are JV partners I am the money they find the opportunities and execute the business plan.. Just like if you were going into partnership with a friend or relative. So for them it is no money out of packet..

I closed one last week for my Partner in Augusta GA..  went like this.

She is a very experienced agent and has rehab crews.. so check that box.

Starter home  that sold for 150k

I put up the 100k to buy and rehab.. she found it and did all the work.  She got a commish for buying it as well.  Then we split profits.. But she did not put up anything but her expereince and my partners have to pay the UTLS.. I cant be paying utls on 100 plus deals I have going at anyone time :)  She made over 25k plus commish and spun it in 75 days with ZERO of her own money and this is just one of 4 we have working and I am closing two more for her next 10 days .. bigger deals 150 to 225k each.. profits for her will be about the same 20 to 30k each.. I suspect with my money and her superior ability to find  rehab and resell she will make well above 250k with me as a partner for the year ALL WITH ONLY PAYING the Utilities  LOL.. so yes it happens we just dont talk about it on U tube.

 OK MAKES ALOT MORE SENSE! I APPERCIATE IT! 

[Charles East]

https://www.biggerpockets.com/...

Read this thread. Lack of capital is setting yourself up for failure.

[Wesley Whitehead]

@Jay Hinrichs Another question. Woujd it be ill advised to proceed if the seller was willing to loan the seller the down payment.

Hypothetical scenario

Purchase price: 300K

Building: 5 units

HML: 240K for 75% of purchase price and minor renovations

Seller second position lien: 75K

Closing costs for buyer: Est 20K

Other expenses to buyer: Est 25K to furnish unit into a MTR

Cash reserves on hand for buyer after expenses: Est 200K

Est rent: $1050-1100 per unit

Plan: To refinance using DSCR loan and to repay HML lender and seller while using as little personal capital as possible. Not looking to pull any extra equity other than costs to furnish the rental…..if feasible

Would you simply use the cash reserves to fund the down payment rather and potentially leave personal capital in the property rather then have a second position lien for 9 months?

Feedback welcome/encouraged.

WD

[Tim Hall]

@Tyler Piciullo using other people’s money is the only way to scale in this business. As properties come up you need to secure them even if you’re not ready because deals come up when they want not when you want. Also as you get more adept at real estate you’ll want to do more than one property at a time.

[Jay Hinrichs]

Quote from @Wesley Whitehead:

@Jay Hinrichs Another question. Woujd it be ill advised to proceed if the seller was willing to loan the seller the down payment.

Hypothetical scenario

Purchase price: 300K

Building: 5 units

HML: 240K for 75% of purchase price and minor renovations

Seller second position lien: 75K

Closing costs for buyer: Est 20K

Other expenses to buyer: Est 25K to furnish unit into a MTR

Cash reserves on hand for buyer after expenses: Est 200K

Est rent: $1050-1100 per unit

Plan: To refinance using DSCR loan and to repay HML lender and seller while using as little personal capital as possible. Not looking to pull any extra equity other than costs to furnish the rental…..if feasible

Would you simply use the cash reserves to fund the down payment rather and potentially leave personal capital in the property rather then have a second position lien for 9 months?

Feedback welcome/encouraged.

WD

I think you will find it easier to use your funds for the equity then refi.

[Wesley Whitehead]

Quote from @Jay Hinrichs:

Quote from @Wesley Whitehead:

@Jay Hinrichs Another question. Woujd it be ill advised to proceed if the seller was willing to loan the seller the down payment.

Hypothetical scenario

Purchase price: 300K

Building: 5 units

HML: 240K for 75% of purchase price and minor renovations

Seller second position lien: 75K

Closing costs for buyer: Est 20K

Other expenses to buyer: Est 25K to furnish unit into a MTR

Cash reserves on hand for buyer after expenses: Est 200K

Est rent: $1050-1100 per unit

Plan: To refinance using DSCR loan and to repay HML lender and seller while using as little personal capital as possible. Not looking to pull any extra equity other than costs to furnish the rental…..if feasible

Would you simply use the cash reserves to fund the down payment rather and potentially leave personal capital in the property rather then have a second position lien for 9 months?

Feedback welcome/encouraged.

WD

I think you will find it easier to use your funds for the equity then refi.

Jay,

Appreciate the feedback and I was hoping you might expand on your response about how it would be easier.  Thanks for you time and please keep the feedback coming (at you earliest convenience).

WD

[Mike Klarman]

Well, this is a seasoning issue. Have them deposit into the LLC account, and then season the money. That is, wait until the deposits disappear from your transaction history.

If the transaction is visible they will of course ask and if you say it is for the purposes of the loan they they will ask those contributing be on the said LLC for 10% or else it is "straw" borrowing and no lender can do that.