Is hard money recommended for your first flip?

Houston, Texas
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Is hard money recommended for your first flip?

Jake Harrington
New to Real Estate · Houston · Member since 2019 · 6 posts · 3 votes

I've been stalking these forums for a while now and y'all are so helpful. Thought I would put out my first post :)

For background, I'm a new investor in the Houston area doing research before my first flip. It looks live ARV will be around 275k-300k.

My question is, when starting out is hard money the way to go? It seems like most investors start out this way. 

But based off the books I've been reading, such as J. Scott's book, hard money isn't always recommended and it's better to go with a portfolio investor such as smaller banks, or partnering with other investors, or of course seller financing. 

Jumping into hard money as a new investor seems insanely risky. I suppose I'm looking for any advice on how you found an alternative to hard money. 

Or on the flip side (see what I did there?), what made you feel secure taking the leap with hard money and going after that first flip.

Partnering with an investor or doing seller financing would be ideal, but I'm still growing my network by cold calling other investors and real estate agents and attending local events. Trying to build out that dream team of contractors and subs as well.

A mentor would also be super helpful, but like I said, still building out that network.

As far as my personal situation, I have a good credit score, a decent amount of savings (200k cash) and a little more than that in investment accounts along with some equity in my current home, a mortgage, and car payments.

Any advice would be greatly appreciated.

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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
2y

Its definitely dependent on a lot of variables, personal situation/risk tolerance, etc.

But high-level, I would say that there can certainly be a balance - sometimes people forget that when using hard money or any sort of financing, for some reason you need to "MAX out leverage" - i.e. do a 100% financing for a flip or a max cash-out refinance etc..

However, most hard money lenders would be totally willing to do a lower leverage loan (and would probably prefer it) such as 50% or 60% LTC instead of the usual max amount.  This gives cushion and greatly reduces risks on all sides - but doesn't require you to go "all cash" or wait to save up to jump in and get started

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    2y

    Hey Jake, 

    This highly depends on what kind of approach you would like to take. Are you planning to flip and build up more liquidity? Are you looking to buy and hold rental properties to ride out the wave? Are you looking to incorporate the BRRRR strategy and expand your real estate portfolio?

    Hard money is risky, but it is used for certain types of investing. If you are looking to start a flipping business, hard money is a good way to get started. Many graduate into partnering with local private money lenders the more experienced they get. 

    You can also use it to help you BRRRR since many hard money lenders finance 100% of the renovations. If you have a solid exit you may be able to cash out your initial investment on a DSCR loan to continue to buy more real estate. This is tougher to pull off nowadays.

    Lastly, you still can take advantage of house hacking with a low 5% down payment, or 3.5% down on an FHA loan (if you do not have one active already). There is an underwriting requirement that the property must be bigger or better than your current living situation, but there can be ways around this requirement through compensating factors.

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  • Jake Harrington
    OP
    New to Real Estate · Houston · Member since 2019 · 6 posts · 3 votes
    2y

    Thanks for the reply Erik, lots of stuff to think about.

    At the moment, I am interested in flipping only. Trying to stay focused on flipping while learning the ropes. Maybe I'll branch out in the future, but not sure yet.

    Slow flipping or house hacking would be great, but I have a 4 month old and we love our house, so that's off the table.

    I guess I'm looking at ways to minimize risk when starting out. At the end of the day I might need to go with hard money and jump in head first. 

    But for now I'm still building out the local network. If I'm lucky I'll find an opportunity to partner with someone or shadow another investor first.

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    2y

    @Jake Harrington thanks for the post here.  Always great to hear from a fellow Texan.

    The main question I would pose here is - what are your options?

    I say this because we usually execute with Hard Money because our other loan options aren't good enough.  

    I don't think Hard Money is risky at all. It's one of the most consistent forms of acquisition money out there for us as investors.  Now, I'm saying this because the Hard Money lenders I use on my own properties I know, like, and trust.  It is risky to use anyone blindly...and there are entire discussions on how to vet vendors and it usually starts with leaning on other investors in your market.  But I'm off target a little here.

    Hard Money allows us to come out of pocket next to $0 on a property. Just because it's possible doesn't mean it's easy to do. It is common to purchase a property with about $10k-$15k out of pocket. But with DSCR or conventional loans I need 20% down or so. I have millions of dollars of real estate. There's no way for me to acquire that much real estate with traditional lending. Which is why the BRRRR Method or Sub To or Assumptions or all of these other strategies are important. All of those help me purchase a property with as little out of pocket as possible and we usually execute with Hard Money.

    Hope all of that makes sense but feel free to ask anything additional.  Thanks!

    3Reply
  • Jake Harrington
    OP
    New to Real Estate · Houston · Member since 2019 · 6 posts · 3 votes
    2y
    Quote from @Andrew Postell:

    @Jake Harrington thanks for the post here.  Always great to hear from a fellow Texan.

    The main question I would pose here is - what are your options?

    I say this because we usually execute with Hard Money because our other loan options aren't good enough.  

    I don't think Hard Money is risky at all. It's one of the most consistent forms of acquisition money out there for us as investors.  Now, I'm saying this because the Hard Money lenders I use on my own properties I know, like, and trust.  It is risky to use anyone blindly...and there are entire discussions on how to vet vendors and it usually starts with leaning on other investors in your market.  But I'm off target a little here.

    Hard Money allows us to come out of pocket next to $0 on a property. Just because it's possible doesn't mean it's easy to do. It is common to purchase a property with about $10k-$15k out of pocket. But with DSCR or conventional loans I need 20% down or so. I have millions of dollars of real estate. There's no way for me to acquire that much real estate with traditional lending. Which is why the BRRRR Method or Sub To or Assumptions or all of these other strategies are important. All of those help me purchase a property with as little out of pocket as possible and we usually execute with Hard Money.

    Hope all of that makes sense but feel free to ask anything additional.  Thanks!


    Thanks for the detailed reply Andrew. Sounds like there's a big knowledge gap that I have to fill when it comes to HML such as vetting them and choosing one I can trust. Along with the other ways to acquire properties you mentioned such as Sub To or assumptions.

    It's tricky because there is a lot to flipping and acquiring real estate and financing that I'm (unintentionally) ignorant about.

    Lots to learn. Just trying to balance the learning with action so I don't freeze up with analysis paralysis.

    Any advice is always welcome

    0Reply
  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    2y
    Quote from @Jake Harrington:

    I've been stalking these forums for a while now and y'all are so helpful. Thought I would put out my first post :)

    For background, I'm a new investor in the Houston area doing research before my first flip. It looks live ARV will be around 275k-300k.

    My question is, when starting out is hard money the way to go? It seems like most investors start out this way. 

    But based off the books I've been reading, such as J. Scott's book, hard money isn't always recommended and it's better to go with a portfolio investor such as smaller banks, or partnering with other investors, or of course seller financing. 

    Jumping into hard money as a new investor seems insanely risky. I suppose I'm looking for any advice on how you found an alternative to hard money. 

    Or on the flip side (see what I did there?), what made you feel secure taking the leap with hard money and going after that first flip.

    Partnering with an investor or doing seller financing would be ideal, but I'm still growing my network by cold calling other investors and real estate agents and attending local events. Trying to build out that dream team of contractors and subs as well.

    A mentor would also be super helpful, but like I said, still building out that network.

    As far as my personal situation, I have a good credit score, a decent amount of savings (200k cash) and a little more than that in investment accounts along with some equity in my current home, a mortgage, and car payments.

    Any advice would be greatly appreciated.

    @Jake Harrington: There are times to use Hard Money and times not to, as you might guess. Wisdom is knowing which is which.
    We do something a little bit differently, we buy "off market" and take over thier loan & we expect to get low interest rates and equity up front like this. Then we can fix & flip and not need Hard Money or much of or own.
     

    1Reply
  • Ryan Stuckey
    Lender · Member since 2022 · 217 posts · 148 votes
    2y

    Hard money is quite unfairly maligned. It's a tool to be used in the right way, like any tool. Thousands of successful real estate investors have used it the right way to build a lot of wealth. No doubt many have used incorrectly and didn't do so well. Hard money companies are not going to stay in business by causing ruination in their customers. They are built into successful companies only by delivering a valuable service to investors, who come back for more of the valuable service as all parties prosper.

    1Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    2y

    Its definitely dependent on a lot of variables, personal situation/risk tolerance, etc.

    But high-level, I would say that there can certainly be a balance - sometimes people forget that when using hard money or any sort of financing, for some reason you need to "MAX out leverage" - i.e. do a 100% financing for a flip or a max cash-out refinance etc..

    However, most hard money lenders would be totally willing to do a lower leverage loan (and would probably prefer it) such as 50% or 60% LTC instead of the usual max amount.  This gives cushion and greatly reduces risks on all sides - but doesn't require you to go "all cash" or wait to save up to jump in and get started

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Account Closed:
    Quote from @Jake Harrington:

    I've been stalking these forums for a while now and y'all are so helpful. Thought I would put out my first post :)

    For background, I'm a new investor in the Houston area doing research before my first flip. It looks live ARV will be around 275k-300k.

    My question is, when starting out is hard money the way to go? It seems like most investors start out this way. 

    But based off the books I've been reading, such as J. Scott's book, hard money isn't always recommended and it's better to go with a portfolio investor such as smaller banks, or partnering with other investors, or of course seller financing. 

    Jumping into hard money as a new investor seems insanely risky. I suppose I'm looking for any advice on how you found an alternative to hard money. 

    Or on the flip side (see what I did there?), what made you feel secure taking the leap with hard money and going after that first flip.

    Partnering with an investor or doing seller financing would be ideal, but I'm still growing my network by cold calling other investors and real estate agents and attending local events. Trying to build out that dream team of contractors and subs as well.

    A mentor would also be super helpful, but like I said, still building out that network.

    As far as my personal situation, I have a good credit score, a decent amount of savings (200k cash) and a little more than that in investment accounts along with some equity in my current home, a mortgage, and car payments.

    Any advice would be greatly appreciated.

    @Jake Harrington: There are times to use Hard Money and times not to, as you might guess. Wisdom is knowing which is which.
    We do something a little bit differently, we buy "off market" and take over thier loan & we expect to get low interest rates and equity up front like this. Then we can fix & flip and not need Hard Money or much of or own.
     


    issue with sub to is its a fraction of the market by the time you find someone willing to do this for you your competition will have bought sold and profited on many deals.. Sub to is one arrow but certainly not one you can count on..

    the idea of a bank or CU or portfolio lender lending you on your first fix and flip will be very tough to find unless you have subtantial banking relationships with them ( read deposits) .

    HML lenders exit because they are basically the only ones that will do this for new or newer fix and flippers.  

    My suggestion is to use your own cash to do your first couple make sure you work out the kinks then you can leverage with private money HML or find that unicorn sub to deal.
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  • Jake Harrington
    OP
    New to Real Estate · Houston · Member since 2019 · 6 posts · 3 votes
    2y
    Quote from @Robin Simon:

    Its definitely dependent on a lot of variables, personal situation/risk tolerance, etc.

    But high-level, I would say that there can certainly be a balance - sometimes people forget that when using hard money or any sort of financing, for some reason you need to "MAX out leverage" - i.e. do a 100% financing for a flip or a max cash-out refinance etc..

    However, most hard money lenders would be totally willing to do a lower leverage loan (and would probably prefer it) such as 50% or 60% LTC instead of the usual max amount.  This gives cushion and greatly reduces risks on all sides - but doesn't require you to go "all cash" or wait to save up to jump in and get started

    Love this, thank you for the advice. I don’t want to go all in on the first deal and get wiped out. I know it’s probably not ideal from an efficiency perspective but I’d definitely like to manage the risk as much as possible.
    1Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    2y
    Quote from @Jake Harrington:

    I've been stalking these forums for a while now and y'all are so helpful. Thought I would put out my first post :)

    For background, I'm a new investor in the Houston area doing research before my first flip. It looks live ARV will be around 275k-300k.

    My question is, when starting out is hard money the way to go? It seems like most investors start out this way. 

    But based off the books I've been reading, such as J. Scott's book, hard money isn't always recommended and it's better to go with a portfolio investor such as smaller banks, or partnering with other investors, or of course seller financing. 

    Jumping into hard money as a new investor seems insanely risky. I suppose I'm looking for any advice on how you found an alternative to hard money. 

    Or on the flip side (see what I did there?), what made you feel secure taking the leap with hard money and going after that first flip.

    Partnering with an investor or doing seller financing would be ideal, but I'm still growing my network by cold calling other investors and real estate agents and attending local events. Trying to build out that dream team of contractors and subs as well.

    A mentor would also be super helpful, but like I said, still building out that network.

    As far as my personal situation, I have a good credit score, a decent amount of savings (200k cash) and a little more than that in investment accounts along with some equity in my current home, a mortgage, and car payments.

    Any advice would be greatly appreciated.

    I'm a few hours north of Houston and have done flips with small local bank financing. Some have even financed rehab as well as purchase. Interest rates were reasonable, though they will be higher now than a few years ago, but still probably lower than HML.

    2Reply
  • Jake Harrington
    OP
    New to Real Estate · Houston · Member since 2019 · 6 posts · 3 votes
    2y
    Quote from @Jay Hinrichs:
    Quote from @Account Closed:
    Quote from @Jake Harrington:

    I've been stalking these forums for a while now and y'all are so helpful. Thought I would put out my first post :)

    For background, I'm a new investor in the Houston area doing research before my first flip. It looks live ARV will be around 275k-300k.

    My question is, when starting out is hard money the way to go? It seems like most investors start out this way. 

    But based off the books I've been reading, such as J. Scott's book, hard money isn't always recommended and it's better to go with a portfolio investor such as smaller banks, or partnering with other investors, or of course seller financing. 

    Jumping into hard money as a new investor seems insanely risky. I suppose I'm looking for any advice on how you found an alternative to hard money. 

    Or on the flip side (see what I did there?), what made you feel secure taking the leap with hard money and going after that first flip.

    Partnering with an investor or doing seller financing would be ideal, but I'm still growing my network by cold calling other investors and real estate agents and attending local events. Trying to build out that dream team of contractors and subs as well.

    A mentor would also be super helpful, but like I said, still building out that network.

    As far as my personal situation, I have a good credit score, a decent amount of savings (200k cash) and a little more than that in investment accounts along with some equity in my current home, a mortgage, and car payments.

    Any advice would be greatly appreciated.

    @Jake Harrington: There are times to use Hard Money and times not to, as you might guess. Wisdom is knowing which is which.
    We do something a little bit differently, we buy "off market" and take over thier loan & we expect to get low interest rates and equity up front like this. Then we can fix & flip and not need Hard Money or much of or own.
     


    issue with sub to is its a fraction of the market by the time you find someone willing to do this for you your competition will have bought sold and profited on many deals.. Sub to is one arrow but certainly not one you can count on..

    the idea of a bank or CU or portfolio lender lending you on your first fix and flip will be very tough to find unless you have subtantial banking relationships with them ( read deposits) .

    HML lenders exit because they are basically the only ones that will do this for new or newer fix and flippers.  

    My suggestion is to use your own cash to do your first couple make sure you work out the kinks then you can leverage with private money HML or find that unicorn sub to deal.
    I see what you mean. I appreciate your perspective on the different loan options and how Sub To would fit more as a tool to use in the right situation and not the 100% solution.

    It seems like using my own money might be a  good starting point or at least doing a smaller % as HML
    0Reply
  • Sophia Buesing
    Lender · Denver · Member since 2023 · 127 posts · 26 votes
    2y

    Hey Jake! Hard money is great for flipping properties. You could partner with an experienced flipper to lower your risk. Hard money is great for flips because it’s fast and efficient. You have your rehab budget included in the loan vs coming out of pocket with it. Would love to connect. We work with a ton of first time flippers. 

    1Reply
  • Alan F.
    Flipper/Rehabber · CA · Member since 2023 · 1k+ posts · 1k+ votes
    2y
    Quote from @Jake Harrington:
    Quote from @Robin Simon:

    Its definitely dependent on a lot of variables, personal situation/risk tolerance, etc.

    But high-level, I would say that there can certainly be a balance - sometimes people forget that when using hard money or any sort of financing, for some reason you need to "MAX out leverage" - i.e. do a 100% financing for a flip or a max cash-out refinance etc..

    However, most hard money lenders would be totally willing to do a lower leverage loan (and would probably prefer it) such as 50% or 60% LTC instead of the usual max amount.  This gives cushion and greatly reduces risks on all sides - but doesn't require you to go "all cash" or wait to save up to jump in and get started

    Love this, thank you for the advice. I don’t want to go all in on the first deal and get wiped out. I know it’s probably not ideal from an efficiency perspective but I’d definitely like to manage the risk as much as possible.

     Getting wiped out with your cash is definitely a bummer, I don't think defaulting on a lender is a good exit strategy either.

    I started with live in flips, over 22 years of living in a construction site with 3 kids. The strategy was called "buying a s****y and fixing it up"

    0Reply
  • Joey Zawacki
    Investor · Macon, GA · Member since 2020 · 14 posts · 6 votes
    2y

    I love hard money. Interest is awesome as long as it creates cash flow and is making you money. And the only way it will make sense is if you ran the numbers, the comps and ARV are correct, and you have a fast dispo on the flip and the time frame.

    I have advanced software for my comps and ARV’s, it also runs my numbers for all costs associated, including holding costs, exit costs, all of it. I know EXACTLY where and how my numbers work and if I take longer than expected on construction and the sell (dispo- Sale)

    Let me ask you a question, if I loaned you 100k at 20% interest and you had no money out of pocket cause you used a gap lender at 9 %, and you still made $15k in 3-4 months OR MORE (I shoot for 15% profit), would you use the hard money loan to gain experience, knowledge and then leverage into better Interest rates the more you do? ABSOLUTELY

    more you partner with someone who helps you with experience and knowledge on one or two flips to get you experience and use their leverage to help you. Ask yourself this? What’s THAT worth to you?  I’d love to chat more on a call. I’m a Rehab & Retail investor —- Joey
     

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Joey Zawacki:

    I love hard money. Interest is awesome as long as it creates cash flow and is making you money. And the only way it will make sense is if you ran the numbers, the comps and ARV are correct, and you have a fast dispo on the flip and the time frame.

    I have advanced software for my comps and ARV’s, it also runs my numbers for all costs associated, including holding costs, exit costs, all of it. I know EXACTLY where and how my numbers work and if I take longer than expected on construction and the sell (dispo- Sale)

    Let me ask you a question, if I loaned you 100k at 20% interest and you had no money out of pocket cause you used a gap lender at 9 %, and you still made $15k in 3-4 months OR MORE (I shoot for 15% profit), would you use the hard money loan to gain experience, knowledge and then leverage into better Interest rates the more you do? ABSOLUTELY

    more you partner with someone who helps you with experience and knowledge on one or two flips to get you experience and use their leverage to help you. Ask yourself this? What’s THAT worth to you?  I’d love to chat more on a call. I’m a Rehab & Retail investor —- Joey
     


    I have been asking BP members this for 10 years and you will get folks chiming in your crazy to pay 20% CRAZY and will shoot it down.. there are those that understand the value proposition folks like us bring.
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  • Ryan Stuckey
    Lender · Member since 2022 · 217 posts · 148 votes
    2y
    Quote from @Ryan Davies:

    Most work this way: 

    • Rates: 9% to 13% (Most Deals are 11-12%)
    • Terms: up to 36 Months (Most Deals are 6-12 months)
    • Fees: 2-4 points(%) of loan amount paid at closing (Most Deals are 3 points(%))
    • Minimum Loan Amount: $50,000 (For loans less than $250,000 we charge $2,500 minimum)
    • Max Loan: 65%-70% of After Repair Value(ARV)
    • 100% Rehab Financing Available (Require 20% of purchase price down payment or cross-collateral)
    • Closing Timeframe: 48 Hours - 3 Weeks (Most Deals are 2 Weeks
    • We have private lending partners throughout the entire United States that cover the following states: AL, AZ, AR, CA, CO, CT, DE, FL, GA, HI, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NY, NC, OH, OK, OR, PA, RI, TN, TX, UT, VA, WA, WV, WI, WY.
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     Spam

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  • Jacob Sherman
    12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes
    2y

    Hey Jake ! Most go the hard money route due to turn around time and processing . A hard money loan is no income no doc and you'll close in 2-3 weeks . With a local bank it will be full doc and possibly a month or two to close . What type of properties are you looking at ? 

    0Reply
  • Juan F Alvarez
    Lender · Aventura, FL · Member since 2024 · 9 posts · 1 vote
    2y

    The purpose of hard money is to have access to properties that otherwise you wouldn't have access to. 

    It is the equivalent to buying a property cash, and its main purpose is exactly that, to not miss out on a great deal, because access to funds. 

    Yes, the interest rates are higher, but they are to be carried over a short term - 1 to 2 years max, and you'd be making interest only payments, which will allow to keep payments lower while the property starts making income for a refinance or gets sold as a flip. 

    Additionally, although many lenders do look at your personal credit to see if you are a decent guy that pays his bills, it will be a loan made out to an LLC not to you and therefore it wouldn't show on your credit. Making it great to scale up, since a hard money lender is only concerned about the property and not your personal debt to income like a traditional bank would. This allows you to have many loans at the same time to scale up your operation.

    So it has enormous advantages for sure, but it is imperative that you know how to identify a good deal and have a clear exit strategy and a timeline before you jump in. You need to have your team lined up ready to do the work the house needs asap. 

    Look for companies that don't charge a prepayment penalty. That way if you sell the place quicker than you anticipated you can pay the loan off without any financial  consequences. 

    Also, a good lender won't let you go into a bad deal. And although some companies like ours will lend to inexperienced flippers, it does help the terms if it's someone that has some experience, because the person is perceived as less risky once they have a few projects under their belt. 

    1Reply
  • Jimmy MarksBusiness Member
    Property Manager · Spring, TX · Member since 2016 · 56 posts · 31 votes
    2y
    Quote from @Jake Harrington:

    I've been stalking these forums for a while now and y'all are so helpful. Thought I would put out my first post :)

    For background, I'm a new investor in the Houston area doing research before my first flip. It looks live ARV will be around 275k-300k.

    My question is, when starting out is hard money the way to go? It seems like most investors start out this way. 

    But based off the books I've been reading, such as J. Scott's book, hard money isn't always recommended and it's better to go with a portfolio investor such as smaller banks, or partnering with other investors, or of course seller financing. 

    Jumping into hard money as a new investor seems insanely risky. I suppose I'm looking for any advice on how you found an alternative to hard money. 

    Or on the flip side (see what I did there?), what made you feel secure taking the leap with hard money and going after that first flip.

    Partnering with an investor or doing seller financing would be ideal, but I'm still growing my network by cold calling other investors and real estate agents and attending local events. Trying to build out that dream team of contractors and subs as well.

    A mentor would also be super helpful, but like I said, still building out that network.

    As far as my personal situation, I have a good credit score, a decent amount of savings (200k cash) and a little more than that in investment accounts along with some equity in my current home, a mortgage, and car payments.

    Any advice would be greatly appreciated.


     Hi Jake - I'd actually recommend using your $200K cash and/or using a line of credit from a bank. I have a few unsecured lines of credit from different banks. I use them all the time for purchasing properties. These operate like hard money loans, without origination fees or draw requests. You can basically access the money whenever you want. As long as you have stable income, most banks will lend you some amount. Happy to provide more details if you'd like to connect through direct message. 

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