Is Hard money the only way to start?

Question

So we found what could have been our first deal. Everything checked out and we were ready to move forward. After talking to multiple lenders we quickly discovered that conventional lenders are not set up to deal with investors. In fact it seems to be set up to discourage investors. Now we are back to square one trying to figure out how to finance this project. It seems hard money is our only option but how does one justify paying 10+%.

Taylor L. · Answer

If your deal can't support 10% on hard money, it's probably too thin. Money lenders charge high interest because they're taking a massive amount of risk in your deal.

Travis Phillips · Answer

Man... lots of great info here in this thread. @Ryan Blake nailed it though. The only thing I would add, well I guess emphasize since he touched on it. Is that you should not be afraid of hard money. Even most hard money lenders will come down on rates as you build rapport with them. Unless your only plan is to do the traditional route and buy and hold, then save-save-save to buy and hold again so you can have 4 properties 20 years from now, then you will need to learn the hard money/private money process.

As you learn about the hard money process you also learn how to structure future private money deals. Not to mention having the fall back of hard money relationships means you rarely have to pass on deals as they arise... as long as it truly is a deal they will fund it. Ryan broke down how the true % interest paid is a lot less than the upfront APR number, and the benefit of interest only means that the interest rate you pay through a traditional mortgage vs. private money is roughly equal. Also, there is less hassle/paperwork/requirements and so on... to boot, there are no limits typically and they are more flexible in terms of your exit strategy. It isn't hard to find a lender who will fund 90% of the purchase price/100% repairs/up to 75% ARV.

If your deal doesn't support paying the financing costs for that type of funding... then it isn't a deal. If it isn't a deal you shouldn't do it and should not be emotionally invested in a property just because its the first one.

But if you REALLY want to go find a bank, then lines of credit are the answer, and the reason people suggest the smaller banks is that they are typically portfolio lenders... which is honestly a lot like hard money lending with the face of a bank.

Either way, I wish you the best of luck! I would love to hear more about your deal and the outcome!

Franklin Romine · Answer

Hard money was a catapult for my portfolio and understanding private funds has change my life forever.

Todd Willhoite · Answer

As mentioned before, if the deal can't support 10% interest it probably isn't a deal.  Having said that, another option is to partner with someone who can provide money for part of the deal.  The other option is to call many lenders until you find one that will make the loan.  The other problem with getting finance on your first deal is that you don't have experience to make the bankers comfortable with your ability to pull off the deal successfully. If that is the case, then partner with someone who has done rehabs/flips/buy and holds before and they will probably have lenders they can work with.  Getting that first deal done, even with a partner, will help open doors when you go back to banks for the next deal.

Kerry Baird · Answer

I'm using Visio for a refinance right now.  Their marketing piece says no DTI qualification, no tax returns, up to 75% LTV on cash out refinances with as little as 3 months ownership seasoning.  Full 30 year terms, and they typically close in a month.

So you would buy with hard money or private funds (from family or ?) fix the house and get a tenant in the property.  Refinance with a lender like Visio, into long term financing after 3 months seasoning, at a rate in the 7% range.

Not nearly as good interest rates as on conventional loans, but they move faster and the lender is looking at how the asset performs rather than at your personal finances.

Mike Dymski · Answer

Most investors use conventional lenders.  Hard money is typically only used for short-term, bridge financing (i.e. a flip...and many use conventional financing for flips too).

Ryan Blake · Answer

@Copeland Duhon

1- We don’t finance flips. They don't. They will fund the purchase of a property but generally will not fund the repairs. They will also want a 15 - 25% down payment for a non owner occupied home depending on your credit and financial position.

2 - If you finance as primary residence you have to hold it for 180 days. What you are suggesting is called mortgage fraud. I do not suggest you do mortgage fraud. That can financially ruin you. NEVER say you are buying a primary residence if you do not plan to actually live there.

3 - We only finance rental properties if they are “move in ready”. Anything that requires major renovations does not qualify. This is fairly common but the lender's idea of move-in ready can be subjective. They don't want to be stuck with a broken down house because they have no guarantee that you will eventually make it move-in ready. You have to be able to fund the repairs by yourself after you have made the down payment required.

I even have $30,000 of my own money to put down......still no deal.... For a conventional note, $30k is probably not going to be enough in any major market. For conventional financing, you will need at least $30k for every $100k of purchase price in reserves for down payment and repairs (30% of purchase price).

If you want to flip you are going to need to use hard money, a family loan, or partner with someone who already has money. Why would you want to get a 30-year loan to hold a property for 3 months? Or the better question is, why would a lender want to go through the process of lending you money on a 30-year note when you only plan to hold it for 3 months?

What margin do you look for in your flips? I personally only go for 72% or better (Purchase + Repairs / ARV = margin %). If you have this number right, you will be able to make money and still use short-term financing of some sort.

Copeland Duhon · Answer

@Ryan Blake that was very informative and precisely what I needed to know. I am currently talking to the bank about an unsecured line of credit to make up the rest of the funds I need for my first deal.

Thank you all for all of your help! It is greatly appreciated. I still have so much to learn and y’all have been GREAT! Thanks again.

Ryan Blake · Answer

@Copeland Duhon

Also, you asked "how does one justify paying 10+%." Just to be clear, you are referring to the APR, not the actual rate paid. You are probably paying around 1% interest / month in interest only payments plus 2 - 4 points up front as the origination fee. By the end of the loan this should be close to 7% total. Make sure you have room in your profit and this will not be an issue.

Tom S. · Answer

@Copeland Duhon  $30k is not a lot to put into a deal.  For a $50k purchase + $25k rehab project I did, I needed $30k, and that $50k purchase was the cheapest I've ever done.  I needed $10k down, $10k reserves, and $10k to start the rehab (later reimbursed).

If you're looking to hold it for a rental, I've had good success with smaller local banks that hold the loan in-house, and have more flexibility on the condition of the property.

- Tom

Is Hard money the only way to start?

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