Draw Fees While Rehabbing a House Using Hard Money

[Ryan Horne]

Hey All,

I have gone full time into rehabbing & selling houses over the last year. In that time I've used several different funding options. My own cash, local community banks, & hard money. I've also used GC's to complete full rehab jobs & depending on how much work a house needs and how comfortable I am with the rehab, often times I will sub out the work to different painters, handymen, electricians, plumbers, etc instead of using a GC.

The more I do this the more comfortable I am managing the jobs myself and it often times saves me significant amounts of money on the rehab costs to just sub out the work vs using a GC for the full rehab. With all that being said, I'm hoping to start using sub contractors to handle the majority of my jobs moving forward, but I'm running into a small snag.

The majority of the houses I'm buying right now I'm using hard money to fund. With pretty much every lender I've used they charge a draw fee whenever I pull a construction draw to pay out a contractor. They're typically $150-$300 per draw depending on the lender. This is typically not a huge deal when I'm working with a GC. They're usually fine getting 2 draws throughout the construction project and it just costs me an additional few hundred dollars in fees. However, in working with sub contractors it is going to require more frequent payments to them vs the one or two draws I would request when working with a GC. I'm trying to figure out how to navigate this without increasing the number of draws I'm requesting from the hard money lenders. 1-2 draws/project I can handle. 5+ and that starts to really dig in to the profit margin on a deal. Has anyone navigated this scenario? Any recommendations for how to best handle this? I could, in theory, just keep some money in savings to float these costs, but I'd really rather that money go to buying another property instead of sitting their floating money to pay contractors.

[Jacob Sherman]

2-5 draws usually on a project . $175-$225 each . Depends on how liquid you are 

[AJ Exner]

Quote from @Ryan Horne:

Hey All,

I have gone full time into rehabbing & selling houses over the last year. In that time I've used several different funding options. My own cash, local community banks, & hard money. I've also used GC's to complete full rehab jobs & depending on how much work a house needs and how comfortable I am with the rehab, often times I will sub out the work to different painters, handymen, electricians, plumbers, etc instead of using a GC.

The more I do this the more comfortable I am managing the jobs myself and it often times saves me significant amounts of money on the rehab costs to just sub out the work vs using a GC for the full rehab. With all that being said, I'm hoping to start using sub contractors to handle the majority of my jobs moving forward, but I'm running into a small snag.

The majority of the houses I'm buying right now I'm using hard money to fund. With pretty much every lender I've used they charge a draw fee whenever I pull a construction draw to pay out a contractor. They're typically $150-$300 per draw depending on the lender. This is typically not a huge deal when I'm working with a GC. They're usually fine getting 2 draws throughout the construction project and it just costs me an additional few hundred dollars in fees. However, in working with sub contractors it is going to require more frequent payments to them vs the one or two draws I would request when working with a GC. I'm trying to figure out how to navigate this without increasing the number of draws I'm requesting from the hard money lenders. 1-2 draws/project I can handle. 5+ and that starts to really dig in to the profit margin on a deal. Has anyone navigated this scenario? Any recommendations for how to best handle this? I could, in theory, just keep some money in savings to float these costs, but I'd really rather that money go to buying another property instead of sitting their floating money to pay contractors.

Ryan,

I know of a lender that automatically budgets 4 draws into the budget which might save you a little bit on that end, plus they defer the monthly interest payments which might keep you more liquid.

As you get going there are definitely a few options, just shot you a DM and would love to help if I can.

Good luck!

[Mike Klarman]

So, one way to combat this is to be liquid and be able to fund out of pocket as much as possible and limit the number of draws you take.  The draw fees can be annoying if you do more than 3 draws.