When to use hard money for down payment source?

Question

If private lending (immediate network of family/close friends) isn't an option, would the next step be a hard money lender?  I only need it for the 20% down payment, not to finance the full asset, an 8 unit apt.  Is it unwise to borrow the down payment with a high interest loan?

Charlie Fitzgerald · Answer

you are not likely going to find a hard money lender to go into 2nd position for down payment money, nor will you likely find a lender in 1st position to allow you to borrow the down payment.

Mark Douglas · Answer

@Jason Hirko @Charlie Fitzgerald  So for those who do a partnership or JV, and one partner is just the equity guy providing the down payment funds, and maybe the other guy brings non-monetary resources (he can do the rehab, or he can manage the finances, etc) and other value to the table... in this case, the guy that just brings "other added value" doesn't have any skin in the game either, if the deal goes south, right?  Unless I'm missing something here.  Not trying to argue, you guys know a lot more than me!  I have legitimate questions about this though..

Everyone keeps saying "skin in the game", but there are lots of cases on BP where I hear experienced (and even inexperienced) people putting together projects without draining their bank account.. Is that the answer?  Do a good number of small deals on my own before I can put together projects with other investors' capital?  I guess I'm saying, just because I don't have $80k laying around, doesn't mean I'm not serious about this.  Please let me know if you had $80k when you were 23...I think the fact that I'm on here in the first place, and just closed on my first duplex in March, and am fixing up one side, and already renting the other side, shows that I'm fairly serious about this.  I may not have a 100 unit complex, but I'm starting with something.  If I had the money to put down, I'd just go conventional and post a success story, instead of this post :)

Should I stop looking at projects larger than what I can handle on my own?? That would limit me to pretty much 4 units and under.  That seems counter-intuitive to what I've been getting from the blogs, forums, and podcasts.  I'm hearing that you can look to others to make up parts that you lack.  (If you don't have good credit, get a partner to sign the loan, and share the profits, etc.)

Just seems that there are two different camps.  Camp 1: Skin in the game - you need to use a significant portion of your money to prove that you're serious.  Camp 2: Creative financing/collaborating, which people want a track record to verify your abilities...  Is there a happy medium?

I'm hitting a brick wall everywhere I turn, and no one seems to remember what it was like when they were first starting out...  Not you guys personally, of course.  Various lenders that I talk to ... I was asking one about a line of credit, and he basically said I have to show $300k in assets, to qualify for a $30k line of credit.  (Why would I need to borrow $30k if I have $300k in assets..?)

I really do appreciate your advice.  Please know I'm only venting, nothing at all personal.  Just slow making progress when you see how powerful REI is.

Ben Zimmerman · Answer

@Mark Douglas You can partner up, however it can often be difficult finding a partner willing to front the cash when you are just starting out.  Be brutally honest with yourself and switch roles for a moment, if you were a professional investor who had 80k sitting around, would you really give your hard earned money to a 23yr old with no proven track record of being successful so that he could go do a deal?  Or would you give that 80k to someone else who has been doing this for years, and has a long standing record of being very profitable?  Being young and ambitious is great, however a lender cares about neither of those attributes.  The only thing a lender cares about is are they going to safely get their money back?

Your best bet is to find a few creative financing deals.  Finding these deals does require a bit of work as you won't find them sitting around on the MLS.  Find an owner who is willing to do seller financing, or someone in a tight spot who is willing to sell their property Subject To.  Either of these options will allow you to purchase with low or no money down.  Once you have a few properties under your belt that are successful, it is much easier to find partners willing to do bigger projects with you.

Regardless of what you decide to do, realize that real estate is not a get rich quick scheme.  While some people were lucky enough to time the market perfectly after the 2008 crash, the overwhelming majority of investors built their empire slowly over the course of decades.  Being 23 is a good thing, it means you have plenty of time to achieve your goals, but don't beat yourself up if you don't achieve those goals by 2017...

Jason Hirko · Answer

@Mark Douglas Here's what a lender is going to want to see when they make a loan (no matter what they may tell you)... if you default on the loan, they can unload the asset the next day and then come after you personally for the difference in what they sold it for and what you owe. It is really as simple as that. If you don't have that difference, the loan will be extremely risky, and if you could find someone who'd do it, the terms would be outrageous.

What you're talking about with JVing would absolutely work. The bank/HML/etc doesn't care who is personally guaranteeing it, as long as there's plenty of room to cover that difference. So if you bring to the table the willingness to be the 'guy on the ground,' and you convince a money guy to back the project with his guarantee and down payment, a lender will think that's just fine and dandy and you'll be on your way. You don't have to have skin in the game, so to speak, but someone signing on the loan does. How you convince a money guy to back you when you're just starting out is a whole other issue though, but definitely one you can work through.

Don Konipol · Answer

It is always MUCH harder to buy an asset when you have no money than when you have significant capital. Much harder, but not impossible.  Think CONTROL of the asset, rather than ownership.  This will open up more possibilities.

Mark Douglas · Answer

@Jason Hirko  Thanks Jason, I'll keep this in mind.   To yours and @Ben Zimmerman's point, I could be perceived as pretty risky, given my little experience.   @Brian Corbett  Thanks for the advice!  I've been speaking with some owners about seller financing, so far nothing yet, but hopefully something will come through.  I don't mind growing slowly, but I'd like to keep some momentum before I become complacent.   Thanks everyone.

Jassem A. · Answer

if you have 80k of equity in one or more other properties then you could leverage it to pay the downpayment. Probably your best option. You could also buy a cheaper property that might have some instant equity and lower downpayment and then refinance it at 80% LTV or better after purchasing it and fixing it up.  You can probably find this in a bank owned or off market property.

Jason Hirko · Answer

@Mark Douglas As @Charlie Fitzgerald said, neither your HML or your conventional lender are likely to do this. There are some HMLs that will lend against the ARV, and in some cases effectively lend 100%, but as you can imagine, these are few and far between, and usually only in very competitive markets for HM, and of course, they are much more expensive.

The problem with borrowing for your down payment, even if it is from family and not even listed on the deed is that you haven't shown the bank that you have any skin in the game. Even if you somehow got $80k deposited into your checking account before closing, a conventional lender is going to ask to see where it came from.

Brian Corbett · Answer

@Mark Douglas Congrats on being in your position at the age of 23!!  Keep plugging along, even if this deal passes you.  One method that has worked for me is family and friends willing to invest with me on a project by using their capital for down payment and improvements while I hold the financing.  The "skin in the game" for me is the 1st mortgage on the property.  I can get this financing from a local bank that does in house approvals/underwriting and they do not ask where the down payment or improvement money comes from.  As long as the deal works with ARV, equity, and cash flow then you should have a slightly easier time putting these deals together.  Keep working and you will build your business!

Derrick Moore · Answer

@Mark Douglas,

Hi you can look at banks that offer a Portfolio loan. A Portfolio loan, minimum loan amount is $50,000 and 20% down, for 1-4 units. But I see your looking at 8 units so its going to be 25% down. However the interest rate is going to be lower with a Portfolio loan than a private lender.

When to use hard money for down payment source?

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