Putting funds out is something I dont want to do
Developer · Philadelphia, PA · Member since 2018 · 35 posts · 21 votes
Are there any lenders who really fund a project before work is started?
Something you don't want to do or something you can't do?
If you just don't want to, get over it. Fund your first deal or two yourself, get some experience, build a portfolio of successful projects, and then lenders will be more willing to lend to you.
If you can't put up the funds, I would recommend either getting a decent down-payment (20-40%) from friends or family, or finding another investor to partner with on the deal (he puts up cash, you put up equity), or worst case, wholesale the deal.
If you have good credit you can get plenty of people to loan you money for rehabs. The interest rate will vary based on that. If you have a good relationship you will get a people to throw you money. Generally private money.
If you don't know people and you don't have credit to guarantee them a return on a personal level. It is not easy.
Just my 2 cents and good luck
Something you don't want to do or something you can't do?
If you just don't want to, get over it. Fund your first deal or two yourself, get some experience, build a portfolio of successful projects, and then lenders will be more willing to lend to you.
If you can't put up the funds, I would recommend either getting a decent down-payment (20-40%) from friends or family, or finding another investor to partner with on the deal (he puts up cash, you put up equity), or worst case, wholesale the deal.
Hi J
I have done hundreds of houses so the experience isnt something im looking to gain. I also own a construction company that builds new construction homes as well as renovations and rehabs. There are several companies out there that want to give me loans between 6%-14% interest and 2-8 points. I also have friends that would easily give me 200K to invest with little on their return. I am not looking to borrow from friends, take money out of my own savings account or borrow from a company that is going to make a quick $40K + and not have any money up front. Every single lender out there wants to fund a project but they don't want to give you money up front. It seems from the people I know, the companies I spoke with and friends that flip for a living all told me that they couldn't find a lender who didn't want to see work completed on their draw prior to being given the first deposit. I am not looking to do 1-3 houses I am looking to purchase an entire block of lots which I am funding on my own and build 20 new construction houses (is my goal).
No offense but you have people who know you and are willing to give you 200K with little return, but you don't want to go that route. You have lenders saying sure "6% with a couple points" and that isn't good enough. You are looking specifically for someone with no relationship to fork over hundreds of thousands plus before any work is done? If you won't risk your money or a friends money and won't take it at 6%, how safe is this deal?
Mike
200k is going to get my 1 house and 90% of the rehab cost with no closing costs encluded. That sort of project isnt what im looking for. To be clear, 200k is great and if I were looking for that id take it in a second. Also, if I were looking for money to do a single rehab the 6% would be great and id still have to put out 25k in my own funding, Ive done it. The question was, Are there any lenders out there (hard lenders) that will fund a project with a deposit prior to the project starting funding 100% of the project (new construction). Getting a loan where I put up the inital 20k and the funder supplys the rest of the 85k rehab cost, is simple. I appreciate your input tho. Thanks Again
You want a hard money lender to front you millions of dollars up front? Have you been reaching out and getting told no? If so, there may be a reason.
Hi Brian
Thanks for the input. No I am not looking for millions. I have gainfully made enough to fund the project myself. I originally wrote the post to see if anyone else was ever in the same situation I find my self in. I read plenty of "Bigger Pockets" more specifically "THE BOOK ON INVESTING IN REAL ESTATE WITH NO (AND LOW) MONEY DOWN". Not sure if you had a chance to read this, but I must say its a great book. I also read a few of Mr. J's books who commented above, via bigger pockets presents. I didn't write the post to get negative or unhelpful comments, mocking me for my post. I am here just as every one else is, and that's to try and get answers to my questions as well as network. I appreciate the comments, but please, positive comments.
Thanks Bud
Well good luck getting the responses you intended. My question about whether you have been trying to get loans and being told no was a legitimate question.
Oh well, happy investing.
I havent tried to get loans, was just trying to have a general conversation and hear everyones input. I value all the comments and feedback.
There are investors that will do equity loans or commercial loans that are zero down. But, what you are asking is for money before the work is done
???? So, you want them to not use the AIA system most banks use is this correct? Then go through a private lender. They do these kind of loans all the time.
I was involved in a travel plaza that was at completion 15 million. The person buying it bought the land and started working it and then when after getting a construction loan. He included the price of the land and all the work he had done to that point in the amount he was asking in the loan. When the lender said they wanted to see his skin in the game he showed all the stuff he had finished plus the land. It took him 3 days to get the whole thing through the lender and he is on to his next project while that first one was still building. Using the money he had paid out of his pocket and then were reimbursed by the loan.
Does this make sense the way I tell it?
So Yes I say there are ways around the issue you are talking about.
Let me know if I can help explain better.
Have a great day and happy building.
Question: If you have the cash to complete the project yourself, why is getting lender draws after completion of work an issue? You can simply front yourself the cash for brief periods of time while waiting for the draws, and then reimburse yourself when the draws are made.
If you want to avoid the typical construction loan process of getting draws upon milestone completion, you are likely to have to go the private financing route. And it's unlikely you're going private lenders willing to do 7-figure loans in the 6% range, unless you're willing to give a personal guarantee and have collateral to cover the full loan amount.
Personally, I've done loans in this range, but only under circumstances where my risk of loss was literally about 0%.
@Anthony Testino I hope you don't take this the wrong way because you sound like a nice guy.
But it sounds like you're having a hard time parting ways with peanuts (relatively speaking). You say you've done "hundreds of houses" and have a construction company... People with that track record don't have these problems.
It's going to be an uphill battle convincing a legitimate lender if you're having trouble financing 25-100K cash outlays.
P.S. Bill Gates and Co. made their money AFTER they had a proven project. And they were doing things at a lot more sophisticated level.
@Anthony Testino I purchase properties all the time like this. One example: I purchased a property for 45k. At closing (purchasing the property) I RECEIVED a wire for about 42k(about 3k closing). My loan was for 90k. This money was used for the rehab. No cash of my own into the deal at closing. I used the money to rehab the property. Costs went a little higher so I ended putting in some money myself at the end.
This was from a friend who knows me and trusts me 100%. He even asked me before closing, "What happens if you disappear? What about the other money that is going to be in your pocket? What if you dont do the rehab and spend the money on something else?
Those are legitimate questions. I told him that was the risk that he is taking to trust me that I would do what I said I would do. At first it made him nervous, but then said, "If I didnt know you, I might be worried that you would dissapear. But I think you are going to do what you say you will do".
But then again at 90k he could foreclose and do the rehab and still come out ok.
That is a big leap of faith, but something friends and family will do if they trust you. Banks and commercial type lenders will not fund something beforehand.
It sounds like you just need to find friends who have bigger retirement accounts or who have "bigger pockets". It is tough to build that trust though.
I have a local meetup, I have a facebook page, website, take calls and answer questions for all kinds of friends, I help others be all they can be. I have spent 1000s of hours helping others without taking anything in return. That is how I have built trust with my friends and family. They know I am always there to help. Thats why they do it for me.
@Anthony Testino I operate in Philadelphia and use hard money consistently. I have tried and tested a few of the hard money lenders in Philly which provide "soft money" rates. Meaning I do not test out the lenders trying to offer me 12%/4 points plus. I have not found any lenders that will fund construction up front, but what I have found is that some lenders do offer more upfront financing on the close than others, which would reduce the amount of cash needed at closing, (not really a big deal buying vacants in philly, as you know). As I build these relationships, I am getting offered cheaper financing in terms of points and interest costs, but it does not seem as though they are willing to fund construction up front.
I do also accept private money loans as well and found these easier to work with overall.
Completely understand the goal of using none of my own cash to fund these deals, to allow me to do more deals and am constantly seeking better ways to do this as well. However, I do understand how some could have a misunderstanding of what you are trying to do, without understanding your background. There are a lot of newbie investors on these forums trying to access the world of real estate and it wasn't until I read all your posts that I understood a little bit more.
Would be interested in connecting further.
I agree with @Irfan Raza about having lower down payments being more beneficial. I generally have 5-10 deals going on at a time, which eats up a lot of capital. I always use hard money for leverage. There are some lenders out there who will do 100% financing or fund a portion of the rehab up front (either up to the full purchase price amount or maybe a third of the rehab up to an amount like $30k), but I generally find their terms to be very expensive. I think hard money rates in the double digits is absurd for experienced investors.
I just closed on a house while only putting 5% down; the HML funded 95% of the purchase price and 100% of the rehab (in reimbursement draws). My terms were about 8.5% and 1.5pts for this high leverage. The low down payment helps me keep a lot of cash in my own pocket to support the rehab and stay liquid.
Private money is nice, but sometimes can be difficult to use in conjunction with hard money. I find that most lenders don't like having junior lienholders behind them; they all want to see you have equity in the game. Of course, there's always unsecured money, but that's generally frowned upon (another discussion for another day).
@Nghi Le I totally agree with you. At the end of the day you never want to have your own money tied up. I'm not sure why there are people out there rich or average who love getting these high interest loans, or dont mind putting out 40-100K out of their own pocket when there's people out there who will let you use their money over a period of time with a little pay back on the interest. I get it, "well if you have it you use it" or "well no body is going to hand you money" but, there's thousands of books out there on how or why you should use others money to gain freedom and profit, which quite a few of them are books produced by bigger pockets.
I also seen that you were starting a loan business. While reading your profile it says that you are launching the end of this month. I would love to hear more about this program and what it actually going to entail.
@Irfan Raza There are definitely those guys in here that are new trying to build their "clout" up on Bigger Pockets and cant even hold a conversation or just became a realestate agent and think they are the next Forbes Agent. I went and took the realestate test just to have it under my wing but that's another story. I do want to talk to you more about who you use, their rates and your recommendations on lenders. There are time I have 80-150K tied on building houses for my construction company that when it comes to flipping I dont want to put more money out than I have it, if I dont have to.
What some people dont get is that its great to be liquid but in situations when you have to be liquid. There are reasons loans were created and uses they are intended for. My Uncle flips for a living and he barrows money from his brother in law. Roughly 250K every 9 weeks. His flips only return him 9K but he pockets roughly 60K during the rehab, his houses only cost him 50-60 and the rest is rehab cost, which whatever's left he pockets as well. He pays no interest on his loans and splits the profit with his lender once the property sells. Its almost imposable to find a lender like that. In my case I dont mind closing cost, but I want 20-30K upfront, and that's it.
I don't think there's a clear right or wrong way in regards to high-leverage loans. It just depends on your goals and preferences, how you feel about money and debt, and how risk-averse you are. The "leverage as much as you can" ideology rubs a lot of people the wrong way, but there's some validity behind that fear. From a lender's perspective, the biggest determinant of risk is the LTV and skin in the game.
Lenders have been burned by worst-case scenarios, i.e. if you default or the market turns. There needs to be enough equity in the deal so that it will sell at auction or they can sell it quickly if they happen to foreclose. People always look at the ARV and say there's plenty of equity, but lenders care about as-is value because that's what the house sells for in its current condition. Getting an ugly house to reach its ARV potential usually means you need to manage contractors, which is not what lenders are in the business of doing. So if you're asking lenders to give you 100% financing or front the rehab money, you're asking them to be underwater from the get-go.
The situation with your uncle and brother-in-law sounds more like a partnership than a lending relationship. There's a different risk factor for those.
Overall, I do feel like the highly experienced investors are underserved by lenders right now and that there isn't really a good product out there for them. It's a problem we're actively trying to solve.
My team saw your inquiry about our product. We are doing a full digital launch towards the end of the month, but we've been doing loans in "stealth mode" for a while now. I'll send you a response over e-mail.