How hard it is to get a hard money loan for your first flip?

[Alex Prescott]

Hi all.  I am a newbie investor with a full time job and have about 20K saved up.  I have been looking at getting into RE investing for some time now.   I have spent the better part of a year learning as much as I can and feel like it's time to take some action.  I want to start with a flip.  My question is how hard is it for a newbie with no history to get a hard money loan?  I've read they mostly like to work with experienced investors who have completed at least a few flips.  Let's say I find a deal and I've ran the numbers and I'm confident that it meets the 70% rule.  How hard would it be to find a hard money lender to fund the purchase price AND rehab?  Are they only going to fund the purchase price for my first deal?  Bearing in mind that I only have about 20K to work with I'm not sure what kind of deal I can go after until I understand what I can get.  Should I just start reaching out to hard money lenders and ask theses questions directly to them.  I don't have a deal yet so that doesn't sound like the right path.  But I feel like I can't look for a deal until I know my price range.  Any help would be appreciated.  

[Patrick Prunty]

@Alex Prescott

In my experience, you can find a hard money lender when you lack experience but you should expect the terms to be less favorable (meaning you should expect/need more cash than if had prior experience). Perhaps not necessarily a higher interest rate or higher points but instead, more cash in the deal and thus a lower LTV and thus a lower risk to the lender. For example, if the usual hard money structure is 90% of acquisition and 100% of rehab so long as the total loan amount is less than 70% of ARV, then I would expect, due to lack of experience, that you'd be looking at 85% of acquisition (as opposed to 90%). Much of this will depend too on where you are located (if not local to the flip), the geographic location where you intend to flip and the associated price point in that geographic location. Further, unless you are buying at a price point under 75,000, or the rehab is minimal, you don't have much room to work with if you 20,000. See numbers below...

75,000 acquisition, 20,000 rehab and 135,000 ARV.

With ARV at 135,000 at a maximum loan of 70%, you can borrow up to 101,250 which means, in this scenario, you could get the 85% of acquisition and 100% of rehab, i.e. total loan amount of 83,750 with an initial release at close of escrow at 63,750 which is 85% of acquisition, and, the rehab holdback of 20,000.

15% of the 75,000 acquisition down is 11,250 and closing costs are likely ~3,000 so you initially need ~15,000 to close

After close, a prudent hard money lender will require reimbursement style draws which means you must first complete at least phase one of improvement/rehab to the property before drawing down on the rehab hold of 20,000.

With only ~5,000 left over after close, you don't have much room for soft costs like utilities, nor much room to get the rehab started, nor much room for the monthly debt.