Flipper/Rehabber · Los Angeles CA (los angeles, ca) · Member since 2020 · 23 posts · 1 vote
Hello all!
How do you guys feel about working with a hard money lender?
I am planning my first house flip and coming into it with a partner. The plan is to purchase a fixer here on SoCal, rehab it and sell it off within 3 to 6 months. We may consider holding for rental income for 24 months but are leaning more towards buy and flip vs buy and hold.
Any advice on the above would be great! Thanks in advance.
@Stefanny Gonzalez I have done 3 flips so far and used HML on 2 of them. As others mentioned it is the most common way of funding a flip project. Generally it is a 12 months interest only loan at rates in the range of 8 to 12% depending on experience with no prepayment penalties. Before COVID you could get 100% of your rehab cost and 80% of your purchase included. During COVID some of these HML put a pause on these loans and are now gradually re-offering them at less interesting terms.
Aside from financing a successful flip comes down to having a good team (from contractors/sub contractors to material suppliers) and coordination/construction knowledge. Are you and your partner handy? Can help save on some of the labor costs. Or if you use a GC make sure you follow up on your project regularly. Good Luck
Hard money lending is absolutely one source of capital for fix and flip project managers. There are also other avenues available such as private investors ,friends and family capital ,as well as joint venture capital.  all of the above have pros and cons.
I have had good experience with HML's here in the SF Bay Area. The money is not cheap but it is abundant and the lenders understand real estate and real estate investment in a way that traditional bankers do not (or will not because of regulations by which they must abide in screening borrowers). My guys up here can analyze a deal and come to a decision within a day or two.
@Stefanny Gonzalez Hard Money Lenders are a critical component for flipper...find the right partner and you will both be happy you found each other. Granted the cost of their capital is higher but the benefits of having them are immense. PM me if you want to just chat, I too am a newbie flipper.
Appreciate your input Darius, and congrats on all of your success in the Bay Area! This will be my first flip venture, so I'm trying to learn and weigh out options. With HML, how soon are you able to pay off the loan? Example, I buy a home, rehab it in 60 days and sell it 30 days later. Essential the HML held the loan for 90 days and then was paid off.
Hi Joanne, thank you for your input and congrats on getting started! This will be my first flip so I have lots of questions :). The good thing is I have a partner who is splitting the cost with me for the project, and taking half off the profit on the back end.
HML loans are typically for 1 to 5 years and then a balloon payment. I have not seen prepay penalties in my dealings but expect to pay 2-3 points for a short term loan.
HML loans are typically for 1 to 5 years and then a balloon payment. I have not seen prepay penalties in my dealings but expect to pay 2-3 points for a short term loan.
@Stefanny Gonzalez I have done 3 flips so far and used HML on 2 of them. As others mentioned it is the most common way of funding a flip project. Generally it is a 12 months interest only loan at rates in the range of 8 to 12% depending on experience with no prepayment penalties. Before COVID you could get 100% of your rehab cost and 80% of your purchase included. During COVID some of these HML put a pause on these loans and are now gradually re-offering them at less interesting terms.
Aside from financing a successful flip comes down to having a good team (from contractors/sub contractors to material suppliers) and coordination/construction knowledge. Are you and your partner handy? Can help save on some of the labor costs. Or if you use a GC make sure you follow up on your project regularly. Good Luck
Thank you for the input Anthony! My partner and I could do some things ourselves but will most likely use a GE. I have a great team for that whom I trust and the property would be close enough where both of us could keep an eye out on the progress.
How long has it usually taken you to flip and sell a home from the time you acquire it?
Besides not being the least expensive option , they usually have rigid terms. As an example , if you were to find a buyer sooner rather then later , you might not save any interest costs with the a typical HML pre payment penalty.
When we partner with project partners we usually allow a lot of flexibility of exit strategy from wholesaling the property all the way to buy and hold for many , many years depending on market conditions. Also our project manager partners have the ability to pivot and change strategy midway.
Would love to have a conversation with you about your experiences and business. Please feel free to reach out to me and schedule a call. Best of luck in all your endeavors.
Thank you for the input Anthony! My partner and I could do some things ourselves but will most likely use a GE. I have a great team for that whom I trust and the property would be close enough where both of us could keep an eye out on the progress.
How long has it usually taken you to flip and sell a home from the time you acquire it?
I'll say within 6 months from purchase to sale (closing to closing). Also it really depends on the amount of repairs to be done, the market you are in, the financial situation of the buyers.... Obviously at this time everything is out of ordinary so very difficult to predict. Maybe high end flips are more risky right now and entry level homes are still safe. My recommendation is to be extra conservative on your numbers. Worst case scenario you can turn it into a rental.
Hard money and private money has shifted a bit recently with COVID. There’s still plenty of capital for deals, however, the underwriting criteria has changed slightly. Mainly, rates went up by a point or two, LTVs came down by 10% or so, and most lenders are requiring a decent amount of experience and higher credit from the borrowers. Finding money won’t be hard but getting approved on your first deal will be more challenging - in my opinion.
You can offset this by bringing in a partner with experience, having great credit, and putting a good % down. Most lenders rates will come down as you build a track record and especially a relationship with them.
Also, MOST lenders do NOT charge a prepayment penalty for refinancing early. The lenders like you get their money back so they can put it out into another deal. So refinancing into a conventional loan to keep as a rental would be no issue.
Banks are always the cheapest money, so if you still have access to FHA or bank loans , I'd take advantage of them.
Family/individual investors will always be crucial to have, as they may offer cheaper money than hard money companies, do the gap Lending, etc. Down side is their capital is very limited and possibly unreliable (need to pull cash out of investment for fam emergency for example).
Hard money or private money is essential, as most replies have said. It’s essential for scaling your business, but every deal is different and therefor you should have access to lenders in all of the spaces above. Having a couple good hard or private money lenders to rely on for the long term would be a great thing to begin as soon as you can.
My first 2 flips we're with HML. It's worked out great so far - fast close, less than a week. Almost like cash. Only con is it can be expensive, 2-3pts, 8-10%. Held onto for 3-4 months, no prepayment penalties.
As long as your analysis and numbers work, you're good! Although I just got a HELOC on my primary, so I plan to use that for my next project to save on financing.
Kind of want to piggyback off of the original question a bit and ask this from a very novice point of view... to my understanding, hard money lenders offer short term loans at higher interest rates, correct? Which of course makes sense for flippers, but if you went into it intending for it to be a quick flip and then decided to hold & rent instead, how do you navigate this when the loan is for only 12 months let's say. Do you refinance it into a traditional mortgage and use that to pay off the HML? Probably a VERY novice question but just making sure I'm understanding!
Just to add of you have a 15% down payment off sum of purchase price and rehab dollars, there is conventional way to finance a fix/flip still available today. But the loan is your name and your partners as an individual loan, no LLCs allowed. I have written a post that compares this approach to hard Money. Not for everyone but this is a potentially attractive alternative for the right situation. The post is here: https://perryfarella.com/2018/10/rehabbers-looking-for-alternatives-to-hard-money-lenders/ if you can paste it into your browser.
Happy to answer questions any time.
Kind of want to piggyback off of the original question a bit and ask this from a very novice point of view... to my understanding, hard money lenders offer short term loans at higher interest rates, correct? Which of course makes sense for flippers, but if you went into it intending for it to be a quick flip and then decided to hold & rent instead, how do you navigate this when the loan is for only 12 months let's say. Do you refinance it into a traditional mortgage and use that to pay off the HML? Probably a VERY novice question but just making sure I'm understanding!
You said it. Just refinance into a long term loan and you are good to go.
@Stefanny Gonzalez, you probably have your answer above, to add a little more color.
Each lender will be different regarding terms.
I have paid 1% in fees up front, plus have had to keep at least three months interest in reserves. Pre-COVID I was getting quotes of up to 90% of purchase and 100% of rehab, not to exceed 70% ARV. My rates were 12% APR. No prepayment penalty. 12 month term.
With these, you still need money, which it sounds like you have, but sometimes people don't realize that. You need your down payment and reserves, AND money to pay your contractors, depending on your contract with them.
When you take the loan, the hard money lender will fund at closing, like any other lender, and escrow the rehab portion. You start work, and periodically make draws. To get your draw money, the lender will send an inspector in to confirm work has been done, and you will need to submit your receipts or invoices from your contractor. You will also pay a draw fee (typically $100-300 per draw). You use this draw to either pay your contractors or reimburse yourself for payments made.
I have made the most money (absolute dollar amount) on any of my flips using a hard money lender. I have also taken my only loss on a flip using a hard money lender. Every other flip I have funded in cash either alone or with an equity partner. Taking out financing adds risk to the deal, but can in theory pay off very well, and allow you to scale a business much faster.
@Evan Polaski So true. HML will lend you money for repairs but you won't see it until your work is completed partially or totally. So you need money to pay your workers as your project progress. Either you have the cash or you have 0% business credit cards in your wallet. Generally I try to have one final inspection in order to minimize the processing/inspection fees. The team of subs I work with are familiar with that and allow me to pay them once the project is done. Basically as soon as I get funded.
Stefanny, congrats on starting the journey that will change your life.
So, open an LLC with your partner if you have not...
Whoever has the better credit should be 51% in the operating agreement...
You can get your first project funded 85%/90% of purchase if your credit is above 730....
Rehab funds are held in escrow and can only be drawn upon for completed work, so you will need to front the contractor around 15% - 20% of the rehab to get going and then at the end of the project you get that money back.
Your contractor will complete work, then you and he/she will apply for a draw from the lender. The Lender will send an inspector to the site and they will determine the funds that get released to you based upon what was done. You also have title, insurance, and holding costs. Inspections also cost around 200 each.
Cali is a rough market. Not sure what part of SoCal you are talking about but the value add houses are expensive, the contracting work is expensive, which means your loan amount will be very high which leads to very high holding costs. I hear jobs out there take 6 - 8 months to complete. If you carry an interest only loan of about 400k - 500k for 8 months that will be 30k - 40k in holding costs and if you can't sell?? You need money to work in Cali and experience and connections - good contractors, good wholesalers, good agents. If things go wrong with a Cali project, it can cost hundreds of thousands.
My people who want to start, I take them to affordable markets and look for lipstick projects. In and out of the project in 90 days close to close. Quickly build their experience, and pad them with some profit, and now we get to use real estate profits to move up slowly and scale at the proper speed.
Starting too fast can be a recipe for disaster if things do not go well out of the gate.