Hard Money Loan and Downpayment

[Rachel Pratt]

Hi, new RE investor here. I am looking at flip properties. I'm trying to understand exactly how hard money loans work. I've done a lot of research, but am left with one question.

So I've found that a HML will loan up to 80% of the ARV, if I provide a 20% downpayment. This is to insure that I, the investor, has "skin in the game" so to speak, makes sense. So here's my question stated a couple different ways:

- Is the downpayment towards the physical house, or is it for the loan? Is the downpayment a sort of security deposit for the loan? 

- Is the downpayment the amount I invest into the property, or do I get that money back at the end of the day once everything is said and done because it's collateral?

Help!

[Mark Burns]

Hey @Rachel Pratt, I'm just about to complete my first hard money deal. Because it's my first, I'm not an expert but I think I might be able to help you. Are you doing a flip or a brrrr? You say the lender will loan 80% of the ARV if you put 20% down. The way this worked in my deal, I put 20% of the loan down. This means 20% of the 80% loan. Let's use some numbers in an example.

Purchase Price of house: 60k

Rehab: 20k

ARV: 100k

The lender will loan 80% so 80k. However, you need to put 20% of the 80k down which is 16k. That means your loan will be 64k. You use your 16k and 46k of the loan to purchase the house in full. You now own the house and have 20k of the loan left for the rehab. After you complete the rehab, you now have 0k left but the house should be worth 100k. You need to pay back your hard money lender now so you either cash-out refinance it (brrrr) or sell it (flip). You find a bank that will refinance 80% of the ARV. This means you get a check for 80k. You now pay back your hard money lender and recoup your 16k. However, since you refinanced 80% of the ARV (aka: 80% LTV), you now have 20% of equity in the property.

I hope this example made sense or helped. Please understand that I left out certain things to make the example easier to follow (closing costs, loan interest, holding costs).

So, to answer your questions:

The down payment goes towards the project, not the hard money lender. It is to make sure that you are taking risk as well. The lender does not want to be the only one putting money into the project.

You will get some, all, or none of your money back depending on how the numbers in the deal work out. In the example, it was a great deal so you got all of your money back.