How to finance your first deal? What did you do?

[Ashley Sliwa]

Hey everyone, I am looking into real estate investing and curious to know, how you all financed your first deal? I am thinking of starting by flipping, but I do not have quite enough money to afford a 20% down loan. I also am unsure if I would qualify since I own my own home and do not make a huge amount of money extra , my debt to income would likely not qualify. Those of you who have used private or hard money, how do you find good lenders that you can trust? I also am considering partners but am unsure how to find any in my area. Any advice would be great! If anyone is in MA, connect with me!

[Ryan Blake]

@Ashley Sliwa I think you are right about looking towards hard money. Private money might be hard to find outside of family because you have not proven that you can do it yet. HMLs will lend to new borrowers but each company will do it at different amounts and for different rates / terms. I suggest you build a relationship by going and meeting with an HML in your area. They should be easy to reach. AND NEVER PAY ANYTHING UP FRONT! If they ask for money up front before you are at closing, turn and run. It may be a scam.

Once you do contact them, ask these questions:

What is your investor success rate?

This is important to know but can be lied about very easily. Many don’t track this statistic. I don’t know if it is because they don’t really care or just haven’t thought of it. I think it is probably the most important stat. Look for groups who offer referrals to local contractors, Relators, etc. Also, look for groups that have boots on the ground in each market that know the specifics of investing in that area.

How many loans have you closed in this month?

Any good HML will know this number off the top of their head. You want a lender that is busy. If they are closing a lot of loans, they probably have something good to offer. Ask about how many loans they have closed in your area. A good number will vary based on the current market and the size of your metro area. Know that many lenders will say they are nationwide but as far as I have seen, no single HML lends in all 50 states.

What is your maximum LTV?

This is a two part answer. Like the company I work with will finance 100% of the purchase and repair but to a maximum of 70% of the ARV. Meaning that if the ARV is $100k we will finance all of the purchase and repairs assuming they are not more than $70k. Another common funding is 90% finance with a maximum LTV of 70%. Using the same example from above they will finance up to $70k if they purchase and repairs are $77k or more. As you can see, this means your out of pocket will be $7k more.

Is there a pre-payment penalty?

Some will require you to pay the interest through the term or another length no matter how long you hold the loan. Just make sure that you include this requirement in your costs. Most lenders that have pre-payment penalties only have it at 3 months or less. It is pretty rare to buy, fix, and flip to a new retail buyer in less than 3 months. Just don’t use this kind of loan for bridge funding.

What is your draw fee & benchmarks for the repairs portion of the borrowed money?

Know what your fees will be to take out the repair money borrowed. Draws are almost always held back until you reach certain points in the project. They will also charge you to have an inspection by a 3rd party to make sure the work is done. I have seen this range from as low as $100 up to $300.

Do I need to pay anything before sitting at the closing table?

There have been numerous people on BP talking about how they paid application fees but they could never get their loans closed on any deal brought to the company. This is a practice by some less than reputable companies. One I saw charged $500 upfront to be pre-approved and would never actually fund any loans. Just beware. Most reputable HMLs will not charge anything until you are sitting at the closing table and all fees will be listed on the HUD-1 closing document.

And of course, what are the points, interest, and origination/document/admin fees for the loan?

This will vary based on region but in general 2 – 5 points, 10% - 14% APR (meaning this is the annual rate so divide it by 12 to get the monthly interest amount), and documents fees can be from $200 – $1,500. The document fees are what will vary wildly from company to company. Just know them going in so that you can properly budget. You will also want to find out if payments are interest only or if some principal is built in. Most hard money will be interest only payments on the full approved balance of the loan whether or not if you have pull the draw funds for repairs.

If you have any other questions, post them below so that we can all learn from the answers.