Would you recommend a someone new to Real Estate to use a hard money lender for their first purchase ?
I would not recommend using Hard money on your first deals. Its very expensive and can put you negative real quick if you do not get in and out of the project fast. You really need to know exactly what your doing and have a lot of experience rehabbing houses. Most people underestimate the costs, time it will take and the ARV.
Before attempting to use HM make sure to educate yourself on the business, the market, rehab costs in your area etc. Its not a difficult business but theres a lot more to it than it looks and a lot you need to know if you are just starting out.
As long as there is enough profit in the deal to pay the interest and fees, why not do it and use other peoples money for the bulk of the transaction? If you did have the cash laying around to fund the deal and its not making you money elsewhere then use your own cash but if you dont have the cash to do the whole deal then it sounds like the only option you have is hard money / private money.
Typical terms are going to be 12 month term with rates from 8-12%. You may be able to get 85-90% financing depending on your experience.
@Dave Charron That’s pretty much hitting the nail on the head I want to use OPM, to invest. I’ll be sure to look up what typical fees would run and interest to be sure to incorporate that in my deal when making an offer.
HML's are not all created equal. Rates & Terms are important, but there are other things to consider as well. Many investors go out shopping for what they think is the cheapest money so that they can make the biggest profit possible. I agree with it in concept. Both my experience as a lender and borrower for my own projects, cheaper is rarely the case. You also need to ask about fees. And I mean all of them. Is there a fixed cost type of fee at closing, are there draw fees, is there a minimum amount of interest due, is there a loan termination fee... The list goes on. There are a lot of lenders who offer cheaper rates & longer terms who fee the heck out of you along the way. When you are out looking for a good lender to work with, you need to get a list of everything from them and then start adding it into your costs. You may very well find that 12% & 2 point loan is actually cheaper than a 7% & 1 point loan. On the surface, you would never suspect it.
Back to your original question... Should you use HM for your first flip? The answer is maybe. Only you can truly answer that question. You have to look at all available sources of funds. Here's a brief list of questions you should be exploring...
1.Do you have any cash?
2. Should you use it?
3. What's the benefits to using your own money?
4. What are the draw backs of using your own funds?
5. Do I qualify for a bank loan?
6. Do I qualify for a Hard Money loan?
7. How much profit is in the deal? Not just cash, but what are the percentages. Margins are percentage based. What's your margin?
8. Can the property support higher costs and still maintain a good healthy margin for you?
As you consider all of these things... Keep this in mind as well. There is a big difference between a direct cost to you and making a little less when you sell. Direct costs come out of your personal pocket. Making a little less is a lot safer and better position to be in. If the property can support the higher costs of the best HML you get, go for it. If it doesn't, I would suggest it's not as good of a deal as you probably think it is.
@Jeff Cichocki No, I actually appreciate you being so detailed, these are very important factors and some of the things listed I was questioning as far as fees.. are there termination fees etc.. or even fees of you pay the loan off sooner than expected. I figured just like anything else there could be hidden fees. So for that I thank you. I will do my due diligence before committing to anything.
The first I purchased at 30,000 and put 28,500 into it. Sold at $103k. Paid 5 points and 15%. Still made over $20k.
Second $90,000 purchase and $36,000 reno. Sold $169,900. Can't remember profit.
Third failed. $72,000 purchase with $82,000 estimated reno. The lender would not approve draws and I ran out of cash. ended up refinancing with private money and owned the house for a total of a year. Sold at $225,000 but total profit was only around $30k after all the other crap with holding costs and financing.
Hard money is great and will get you where you need to go, but you need to have plenty of working capital.