I am doing my first fix and flip loan where the lender sends me draws after work is done. My question is how do new investors front the initial money to start work if the point of the rehab loan is that they don’t have their own money to do renovation? My rehab will only be $10-20k, so I do have some funds to get it going, but is this typical of hard money lenders? Do you ask contractors to be paid after work is done? I’m gonna guess that answer is no, but just wondering how this would work with a larger rehab.
Lender · Texas; Arizona · Member since 2019 · 276 posts · 282 votes
3y
This is typical. Can't front fund because if you mismanage the contractor and they don't completd the work then the lender has provided funds that didn't go to the property. Also with materials, because materials disappear, can get a draw for them after they are installed. Normally its broken down so the borrower can take a draw each week or so. Not have to wait for the entire project to be done to receive the rehab. You would need to get the rehab started, by deferring payment or carrying with a credit card if you don't have the cash available. But once that first week of work is done you would submit that part for a draw. Using that draw to get the next part started.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
3y
The reality is you should have the funds for rehab, maybe not in full but at least 20-30% most likely. That doesn't mean you actually have to spend them assuming you can either carry contractor payments or you have other options for items like CC for material purchases etc. Also typically HML will have a reserve requirement that will ensure there are at least some cash funds available. So you're unlikely to get a loan and have little to no cash for the actual rehab left in your acct.
Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
3y
Sometimes your contractor will ask for a 5% advance or something to front some of the costs. After that payment should only be made for work verified as completed.
Lender · Austin TX · Member since 2018 · 15 posts · 4 votes
3y
Have an agreement with your contractor that they will be paid once the draw is completed. Start on the reno and request the your first draw right away to help pay and keep things going. Also, use a credit card or account to pay for the materials.
I am doing my first fix and flip loan where the lender sends me draws after work is done. My question is how do new investors front the initial money to start work if the point of the rehab loan is that they don’t have their own money to do renovation? My rehab will only be $10-20k, so I do have some funds to get it going, but is this typical of hard money lenders? Do you ask contractors to be paid after work is done? I’m gonna guess that answer is no, but just wondering how this would work with a larger rehab.
With a hard money loan (HML), if you don't have access to the capital to start the renovations it poses a real problem in managing the project. It points to be stretched really thin. which it was for me. I have remodeling experience, tools and help. All in if it was poker game. If you score well enough for HML you score well enough to get crappy credit cards with $300 limits, I did, do, and have them, unfortunately. You only really need access to enough capital, credit, materials, trades lines, favors, to get the roof materials $4000, or the dumpster for demo debris $550, or whatever gets you to the first draw.
Understand to the day when you get money to pay your contractor. On a larger project we will start with demolition, currently gutting a duplex to the studs, I have a $575 dumpster out front, may need another. Once this job is complete the line item for demo will be complete in theory this could trigger a draw, say payment of $5000 to $7500 upon completion. Your $1200 in dump fees plus 3 guys labor for 5 days $2000, you only need the dump fees up front, as the $2000 is payable from the draw check. This allows you to manage the work flow, use one draw to complete another. Make sure you know how the lender prefers to meet draws, then inform your guys as to how, when, and in what manner they get paid. This way they do not finish up on Friday night at 7:30pm working by truck lights in the dark to get done only to be informed that the check will be available on Tuesday morning.
If at all possible find a contractor that has experience working with HML.
I have been involved in several hard money, private money, and out of town investor deals. The big deal is always with debt service, managing contractors, gas, electric, water, and sewage bills, garbage bill it sounds trivial but when it is time to write checks all the stuff you know the second is taking you to school for being the new kid. For me it added up quickly. Our last building permit was $455.00
Lender · Member since 2022 · 6k+ posts · 1k+ votes
18h
Most Investors have cash set aside for rehabs. Usually from a HELOC or Cash Out.
Is your contractor willing to get paid on a per draw basis? Some are OK with this arrangement as long as the financing is secure and sign a lien waiver. The lender may also want them to sign a contractor guarantee.
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