Hard money loans

[Armando Fernandez]

Is it a bad idea to get a hard money loan for a first flip? Do you need money down? Do you get one under your name or a DBA or LLC? Do you pay monthly or is there a timeframe when it is due in full? I am brand new and would appreciate any information! Thank you!!!

[Nick Baldo]

Hi Armando, 

Using a Hard Money Lender is a great option for your first deal. However, make sure the deal is solid and that you have accounted for the high lender costs and the potential to hold your property for longer than originally planned. 

Most Hard Money lenders will require that you put in some of your own money toward the total "Cost". They will lend a percentage of the total deal, known as the "Loan to Cost". My experience has seen this number go from 60%-100%. I would say 75%-80% of total deal is cost is most common for your first deal. If you can provide evidence that the After Repair Value will far exceed the total project cost, you will have a better chance of getting closer to 100% financing for your deal. 

Most hard money lenders will charge you interest + points + legal/ commitment fees. In my market (Buffalo/ Rochester, NY), hard money lenders are charging 12% + 3.00 Points. In addition, the loans are "No Cost" meaning that all legal and administrative fees are to be paid by the borrower. As you can see...this can get very expensive. The 12% interest is typically paid out on a monthly basis on an "interest only" schedule. This means that every month you are simply paying out the interest accrued on the loan...no principal is being paid down. Depending on the lender, they may require that funds for construction are paid out in draws as opposed to one lump sum when you close the loan. The extra costs to close the loan can range from $2,000-$5,000 depending  on the size of the deal.

I would suggest borrowing as an LLC/ S-Corp. This will help to diversity your risk. However, on the lending side, the Hard Money Lender will almost certainly sign a personal guarantee. So any risk mitigation that comes with the LLC will by nullified by the guarantee you sign.

If your budget allows for the high costs of a Hard Money Lender, go for it. But definitely stay conservative on your estimates. Holding your property for 1 extra month than planned can cost you over $2,000 (Assuming a $200,000 loan)! Feel free to reach out with any specific questions or to dive deeper into anything stated above. 

Good Luck!