Recommended Hard Money Lenders?

Question

I have about 10k to invest into a buy/rehab and flip property. Clearly that’s not enough to get started, any lenders that are willing to work with a newbie? I cannot use a bank due to the fact that my credit isn’t up to standards and not enough work history. I am looking for a lender that finance the property as well as the construction cost. Any suggestions would be greatly appreciated.

Also I’m based in Rhode Island.

Anthony Thompson · Answer

@Janira Blair I know a few. Hard money lenders care much more about the deal than the borrower, but 10K down is a little thin depending on the deal.

I imagine that there would have to be a pretty decent upside on the property (i.e., getting a great deal at below-market-value even in current needs-work condition) for a HML to want to lend on it.

Do you have a specific deal already under contract? Your best bet will be if you already have a specific property you can go to them with, that has some equity built-in.

Most HMLs won't lend both the property acquisition and the construction/project cost up front, but many will do an arrangement where they'll lend X% of the initial acquisition cost (with you making up the difference with your down payment), and then divide the project up into phases, where you front the cost for a phase, then they inspect to make sure the work was done and reimburse you for the cost of the phase. Then that repeats for each phase until the project is done; this setup is often called taking "construction draws".

The reason for this is that it protects the lender by never letting their loan amount get above a certain percent of the property value (LTV or loan-to-value). By doing it through phases and draws it ensures that the money is actually spent on improving the property/collateral, rather than something else (like some other project/property - yes that happens too sometimes).

So always try to look at it from the lender's point of view and assume that none will want to ever have their LTV on a property be greater than, say 75% of its value at any particular time. And as a new investor, you might be looking at more like 70% or even less.

Odie Ayaga · Answer

I do know lenders that will do 100% financing, but a lot of new investors don't realize that doesn't include closing costs, points, appraisals, inspections which all tend to total more than people think. I'd say 30K is a minimum to come to the table with if using a hard money lender. If you don't have that you'll want to look into potential partners or credit

Anthony Thompson · Answer

@Janira Blair it's not clear what you mean by 100K max. Is that the initial purchase price? The amount of the rehab project? Something else?

Again, most hard money lenders will want to stay at or below a certain LTV ratio, so that can answer a lot of questions. I'd use 75% for analysis purposes but you may encounter HMLs saying 70% or less due to your being a new investor (and thus there being a little more risk for the lender).

Smart hard money lenders will assume that the value at time of purchase is exactly your purchase price, unless you can show them clear evidence that you are in fact buying the property for less than its true current as-is market value.

Typically that will not be an MLS deal since almost by definition a property bought from the MLS is bought at market price since the property has been placed on the open market, with an agent motivated to price it at market value, visible to all and subject to competitive bidding, etc.

But if it's an off market deal and you can convince the HML that you are in fact buying it for less than its true market value at the day of closing - which would require your providing comps and possibly having them walk through to confirm that there is not more work needed than in your project plan (yes, you'll have to come up with one of those too - that's how the construction phases get set) - then yes, you could find a HML who would let you put less into the deal initially then an institutional lender would, since institutional lenders always assume the market value is the purchase price.

If you think about it from the lender's point of view, where they always want to keep their loan at or below a certain LTV (e.g., 75%), then it helps you figure out your own #s, how you'll have to present it to them, etc.

It does help if you have a specific property in mind though, as HMLs these days are used to getting a lot of solicitations from new investors and the last thing they want to do is spend a lot of time on the phone with someone, or meet someone for coffee, who is a brand new investor and will never actually end up doing a deal (i.e., creating a lending opportunity for them). So that's why it does help to at least have one or two properties under your belt if you can.

It's an uphill battle as a new investor, but it's not impossible. The biggest thing you can have working in your favor is to go to a lender with an actual deal in hand and be able to explain why it's an actual deal rather than something you're just buying at market price and potentially overpaying for (as many people are these days). If you can do that, you'll have a leg up over a lot of other new investors looking for funding.

Janira Blair · Answer

@Anthony Thompson

The deal would be 100k Max.

What amount would be ideal?

Recommended Hard Money Lenders?

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