Hard money lending question for new investors in California

[Cornelius Charles]

HI all. I have a question about securing funding for your first couple rehabs. This question may be more geared to investors in California, so I can compare apples to apples. My partner and I are in the process of researching hard money lenders. From what we have found so far, the average amount they are willing to lend seems to be between 60 and 80% of purchase price (some include rehab costs, some don’t). How were some of you able to fund the remaining amount that was not offered by the hard money lender? Even if we were to find an awesome deal and a lender that was willing to offer us 80% of purchase price + rehab costs, the remaining 20% definitely is not chump change in California. Thanks everyone.

[Jeff S.]

It is very hard, @Cornelius Charles, for a lender to justify loaning to someone with no money and no flipping experience. They will take all the financial risk and you will make all the profit (albeit hard money is far from cheap).

So-called gap funders typically want a large percent of the profit in exchange for a relatively small loan to make up any difference between what you're able to borrow and what you realistically need. These are usually second trust deeds and, warranted or not, some lenders don't like their first trust deed borrowers taking on a second loan. This never made much sense to me but is something you should ask up front.

A gap funder, or any lender for that matter, will usually not bring anything to the table beyond money. In your case, you could also use the benefit of some rehab experience. If you're going to have to give up a percentage of your profit, you might as well take on an experienced rehabber as a partner to help you. Given the state of the current market, this shouldn't be too hard.

The pickin's are slim lately and everyone is scrambling for viable properties. If you've been fortunate to locate a great deal, you shouldn't have a problem finding an experienced rehabber willing to partner with you. He or she will bring the credibility and contacts you need to get a good loan, perhaps some cash, and the experience necessary to ensure a profitable rehab.

You can attend some of the local REI clubs for any of these individuals.

Good luck, Cornelius.

Jeff