Big opportunity, currently low on cash reserves

[Rick Zink]

I'm in a position I've never been in before.  Just closed on a couple of properties a week or so ago.  They were rehab properties so I purchased under a construction loan.  Took my reserves for down payments to a level that won't allow for another purchase at this time.

Given this, as luck would have it, an amazing opportunity that only comes once in a great while came to me.  I've never used hard money for anything before so I'm not sure that's an avenue for me.

Im hoping someone can maybe explain the ins and outs of this type of financing.  Risks/rewards, benefits/pitfalls of hard money to me...what are they?  I understand the overall concept of it but since this has never been an avenue I have used it's unfamiliar and foreign to me.

[Mike Klarman]

So, let's take 75% of your ARV of 550k = 412,500. That's about where you wanna be max project cost wise, really 400k or less to be under the 75%. You are about 405k - 425k. You are teetering on a possible thin margin.

Even if you only had to put down 10% that's 27,500 plus another 5 - 6k in closing costs.  You may need 35k just to close.  Now you need to get the construction rolling, only the 130k rehab is in escrow and your contractor, if he is worth a grain of salt, will want at least a 20k - 25k deposit on a job of that size, maybe more.  You have to front the deposit, which the contractor uses to get stuff done and that allows the drawing process to start from the escrow of rehab funds.  Then you have holding costs on a loan size of about 400k.  Even at unpaid balance interest only payments the starting payments will be 2k - 2500 per month.  I'd recommend an investor be liquid 75k - 100k to make sure they can get this done and have a cushion, cause as we know you always need a cushion.