Hard Money Loan Draws

16 Replies

Hello all,

Ok so I am looking into flipping a house, but I don't have the money so I am probably going to end up using a Hard money loan or a private investor if I can find someone in my area willing to finance. I have been researching and it appears that for HML's I will have to pay for everything up front, and then be reimbursed afterward for the work done on the property (with a fee associated with every draw I pull for reimbursement). How exactly am I supposed to do this if I literally do not have $20,000 sitting in a bank account to do construction projects? If I had the money, I wouldn't be using a hard money loan in the first place. Can someone please explain this to me, please? I'm super confused...

Even with hard money, it is really tough to do a fix and flip with no cash of your own. My rule of thumb for amount of money you need is that if you have a deal where the purchase plus rehab cost is 70% of ARV, and your HML will lend you 70% of ARV then you will need 15% of ARV of your own cash. If you HML has down payment requirement (many do) you would need that in addition.

That's still a lot better than trying to do with with a conventional loan.  With a conventional loan, you're stuck with a 20% down payment and you're limited to properties that meet the lender's criteria for condition.  And then you have to completely fund the rehab out of pocket.

Hard money is not a miracle.  Fix and flipping is a cash intensive business.  You really must have some cash of your own or from some other source to pull this off.  Other sources might include credit cards, home equity loan, 401k loan, loan from friends or family, selling something, working a second job, etc.

@Sarah Robinson I was thinking the same thing. 

Seems like there's really no way around it and like @Jon Holdman mentioned you would need to have access to cash one way or another to keep the project moving and to keep up with holding costs. 

I have used HML for my last few deals and Johns right, you will need 'up to' 20% down if you've never done a deal before. Then the rehab money comes as reimbursement so yeah, if you want to start your rehab and get anything done then you'll need a little more than the 20% as well.

It's not ideal, but lets say you have a 100,000 purchase and the place needs a roof. You're going to put 20k down and need 5-7k for the roof. So you have the roof done right away and then do a draw and they inspect and reimburse that cost. A roof is pretty straight forward though. Where people run into problems is mis-managing that 5-7k on the 'other' items. The last thing you want is to spend 5k and not get approved for reimbursement!

I've NEVER done a deal where I didn't have at least half or more of the rehab money in the bank.

You can do it, but find the money first....you'll sleep at night!

Ah, well, as much as that's disappointing, I understand that a reality check is in order here. Back to the drawing board haha... Thank you for the honest answers, everyone. :) I'm still learning, and there is quite the curve! I guess my next step is to start/keep saving like mad (already working on that!) and probably find some private money somewhere. Thanks again! 

You cake a personal loan to cover the up fron costs and pay that back with the HML draws.

When starting with fix and flipping you will make three killer mistakes:

  • You'll underestimate the rehab costs.
  • You'll overestimate the ARV.
  • You'll underestimate the time from your purchase closing to your sale closing.

Its likely on the first few deals that you will make all three mistakes.  You need cash to recover from these mistakes.  A partner and I made a loan where the rehabber ran out of cash and ended up giving the property back to use deed in lieu of foreclosure.  We believe he had about $30K of his own money into the deal, but ran out of money to finish.  Unlike a poker game, where you can go all in with whatever cash you have and still have a shot at winning, with rehabbing if you can't get to the finish line you can lose big time.

@Jon Holdman Thank you very much for your honest input. I am hoping to get into this with eyes wide open, and I appreciate people pointing out fatal flaws before I get in too deep. It would be wonderful to partner up on my first deal with someone who has done a few flips, but I know I will need to bring more to the table than what I have right now in order to secure a partner. :) 

@Sarah Robinson we have private money investors that pretty much finance our 'float' / 'gap funding' in order for us to pay for rehabs before the draws come in. 

Also, keep in mind, you do  not have to have ALL of the rehab dollars..just a portion of it, as the draws are usually 3 to 5 times during the process. 

So, your best bet is to show the deal to some friends/family/associates who may be interested in the deal and pay them 10% return within 6 months to make it attractive. 



HML will want to see you have Est 3 months of the interest payment in reserve to begin the work, and then you’ll get reimbursed as you go along.

Each draw will cost between $100-200, and then you get your money back, so the snowball starts to rollover once you begin the process.

Just make sure how the HML will reimburse. Some will reimburse if you simply buy materials and others want to see specific work completed.

That’s a big difference. If you laid out for all your materials but they don’t reimburse you fully for that then you’ll find yourself in a quick bind.

This is an important piece of the puzzle I just discovered as well, kind of a dream deflator, lol. Will likely seek gap financing from private investors and/or wholesale or do some lease options deals to build capital. Just to clarify though, is this true with all HML? They all will only reimburse and none will pay up front?

One other thing, is it possible to have holding costs, selling cost and or any other fixed costs wrapped within the HML itself?

Hoping to get an answer sometime soon so I don't have to open a thread on it :)

I understand I'm chiming in a bit late here, but I've done A LOT of calling around to Hard Money Lenders... at least 2 dozen nationwide. Some will give you an initial draw. Some will not. 

My first deal using Hard Money:

$30k purchase

$28k rehab

$3k upfront draw. 

I used the $3k to pay my contractor some float labor, and then pulled a Menards Credit card for him to buy materials with. With this, he was able to complete the roof, siding, windows, and demo. It was itemized on my rehab sheet as $14,000 in work, so I took a $14,000 draw, DID NOT pay the credit card, and paid him an additional $7500 so he could order cabinets, materials, paint, more labor,etc. I waited until all work was completed and then took a draw for the remaining $11,000. This allowed me to pay down the card a bit, and then I paid for my countertops, garage door, and a few other subcontracted items net 90 after the property was sold and I cashed out. 

If you don't have a ton of cash sitting around, you have to be creative with it and leverage different options... It was cheaper for me to pay the 12% interest on the card than it was to take a few additional $200 draws, so I did that. 

Disclaimer: you can front load your scope... it muddle the water a little, and I'm not recommending you do it, but if you overestimate on items you will have finished first... roof, demo, etc, then you can take a larger draw upfront and help carry you through the next stages. 

There are HML lenders that do 100%, you just have to find them/prove yourself. There is a lot of capital freely available right now and investors need it placed in something like a hard asset. I won't disclose any, and I'm sure every market varies, but in the Phoenix, Las Vegas, and Southern California markets, there are plenty of 100% financiers available. Some will fund the property and wrap the holding and rehab costs. Some will just fund the property and then do a draw as you move along. As a contractor myself, I do my own flips and also work with other investors rehabbing theirs. Best way (in my experience for those investors who use the draw system) is to do demo first (as it is fairly cheap and mostly labor costs) and then request your first draw. That will help jump start your project

A HML that will lend 100% of ARV? No way. 100% of the purchase and rehab costs, perhaps, if you deal is good enough.

If you find a HML who will lend 100% of purchase and rehab and you have a deal where those two total 70% of ARV, your potential profit, best case, is about 15% of ARV. If things go wrong (see my three mistakes, above), that 15% profit can turn into 10% or 5%. Or nothing.

If you have decent credit look into using a 0% interest credit card to cover the costs.  I’ve used a discover that had zero interest for 15 months and an Amex that had zero interest for 18 months.  They helped cover construction costs before hard money lender gave out a draw. Make sure you can pay them back before interest kicks in.  Use credit wisely!

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