How To Make Myself Attactive To Hard Money Lenders

Question

How do I make myself attractive to hard money lenders if this is your first real estate flip, rehab, or long term property?

What exactly do new real estate investors show hard money lenders to get a loan? I haven't tried to get a loan but want to learn more about my options. I'm thinking things like credit score, assets, and such matter. Is cash needed?

Thanks.

Jon Holdman · Answer

Sorry but that's just not true.  At least of the HML I lend money through.  You must have enough cash to cover your part of the deal (though this HML has no specific down payment requirements), all your up front costs, the monthly payments and some cash in reserve.  If anything goes wrong, and it often does in rehabbing, you need enough money to avoid losing the deal.  I've been on the losing end when a rehabber ran out of cash.

Sorry, but that's also not true.  If you had enough cash to do the entire deal yourself, you're correct.  Even then you may get a higher ROI on your deals if you do use a HML.  But if you have some cash, but not enough to do the deal yourself, a HML may be essential.  If you can find the right bank, one that will do loans for rehabbing, that's your absolute cheapest alternative.   If you can find a private lender (someone you personally know, not a HML that calls themselves a private lender), that's a second choice.  But if you lack both of those, and have some cash, a HML may be your only alternative for funding a deal.

I've investigated other financial source that apply more broadly than just real estate.  Things like equipment leasing, receivables factoring, equity financing, angel investors, venture capital, etc.  Guess what?  Every one is MUCH more expensive than HMLs.  So in the grand scheme of where to get financing to start a business, HMLs are one of the cheapest alternatives available.

But the bottom line is that if you have crummy credit, no track record, and no cash you are not going to be able to start in the fix and flipping business.  If that describes you, work on the credit and cash.  If those two factors are OK, and you can find a good deal (the really hard part) then you can overcome the lack of a track record.

Justin Long · Answer

@Jon Holdman, wow, small world. Rosenberg and southwest of it are growing at a rapid pace.

Thanks for the feedback. I'm hoping in starting out I'll be able to use private money. Currently getting my business plan together.

Jon Holdman · Answer

Hard money loans are short term.  So if you're using a hard money loan to acquire a property that you intend to refi and keep you should have the loan preapproval for the refi.

If you're just getting started cash is king.  The HML will do an appraisal, look at your rehab budget and if the numbers make sense the deal is OK.   If the deal is OK the other piece is you.  You need to meet their credit and income requirements and have cash.

You should be able to show cash to cover whatever percentage the HML wants plus costs plus reserves.  @Justin Long the down payment percentage typically applies to the purchase, sometimes to the rehab.  If it doesn't include the rehab costs you'll be out of pocket for that.  You'll also be out of pocket for all other fees.  Welcome to the site, by the way.  I used to live in Rosenberg in the late 80's and early 90's.  Wow has that area grown.

Account Closed · Answer

If you can show them a bank statement with enough to cover a 50% (or more) down payment + rehab costs + holding costs, that will make you as a first time flipper attractive to a hard money lender.  It works to mitigate a lot of the strict underwriting requirements of a conventional lender as well btw.

Justin Long · Answer

@frankr. is the 20-40% down payment or all in (closing costs, down payment, etc.)?

Franklin Romine · Answer

The project and your team will be most important.  Meet with several hard money lenders and find one you can connect with.  Hard money lenders are typically all about feeling safe with the asset your purchasing, which makes sense. But a good lender will want to invest in you the borrow for a longterm relationship.  Also, don't blow a bunch a smoke and be arrogant.  Under promise and over deliver.  Oh yeah you will most likely need 20-40% of the capital for the project.