Hard Money or Another Financing Option?

Question

Hey guys, its been a while so take it easy on me here...lol. My wife and I are looking into our first 'Real' flip and I say first real flip bc our current home we are renting from my father in law, we flipped. So our experience is limited, however, I am a painter and maintenance man for a large apartment complex and my wife is a Realtor. So we aren't complete newbs to the whole real estate gig. My question is in relation to financing our flip. We have fantastic credit, above 750, and tons of available credit, over 40k. We only have about 6k in liquid to invest and even that is a stretch right now. We are wondering how we should fund our first flip? We are hoping to stay below 50k and sell to an investor looking for a nice rehabbed rental house to keep our cost low. I can do a lot of the work myself and plan on saving a lot of money this way. We just would want to be cautious and not use hard money if we don't have to bc of the points and high interest, however, we also don't really have access to private money either. We don't have any investor groups in our area and are extremely limited on family and friend resources for funding. Any advice or recommendations would be appreciated!

Nghi Le · Answer

@Luke Mitchell

If you intend on using hard money, don't choose any that would require a large up-front payment, unless it's for an appraisal/BPO.  Also, most hard money lenders still require you to have 20% down, even if they say they'll finance 90% of your costs.  The reason is that your cash to close also includes closing costs, points paid up front, prepaid insurance, prepaid interest, etc.  They also want to see that you have enough money to start the rehab yourself (because they only do reimbursements) and can survive at least 3-6 months worth of interest payments.  This is what you need to show that you have in reserves.

Staying below $50k might be hard.  Most lenders want loans of at least $100k (to make it worth it for them).  The lowest minimum I've seen is $50k.  Keep in mind that most lenders lend at 70% ARV (usually between 65% - 75%), so if the loan amount is going to be $50k, the ARV needs to be at least $72k.

@Sam Amir I've borrowed from a dozen hard money lenders, half local and half national.  Probably local is a good way to start, especially if you're new and want to talk to someone face to face.  But after you get some experience, national lenders tend to have better terms.  I'm actually flipping a house in Chicago right now using a national lender, and I'm in a different state.

Stephanie P. · Answer

@Luke Mitchell

Do Hard Money has an upfront charge, so you won't avoid coming out of pocket with some cash.  If there are no meetups near you in Albany, you should start one yourself.  It may be worth your while.

Best of luck

Stephanie

Jack Bobeck · Answer

Hard Money is not the devil and is used when you need cash you would not otherwise have from equity or savings. You may find a hard money deal that is short enough (insert your time horizon for the flip) to allow you to build up equity.

Look around and ask the local lenders if they offer a buy-rehab-loan, this would allow you to get all the financing done at once. There are plenty of firms online that offer this as well.

I like Hard Money, as I have a number of contacts who are HM lenders, they know me, they get me, and I can work with them. At some point in your real estate career, you may need HM, good to build a relationship now. Best of luck to you and your project.

Luke Mitchell · Answer

I think I really need to scour my local area harder for private money lenders so I can get better terms. My whole reason to utilize hard money lenders was for no money upfront feature, so if I cannot avoid that, then I need to go another route. Thanks for all the advice guys!

Sam Amir · Answer

Hey Luke it's definitely a benefit that you know how to do a couple things. Saving money by doing the labor yourself is a huge advantage. The liquid $6k that you have, are you comfortable with possibly losing all of that? I'm assuming you thought about this already, but I'm just cautious haha. Another concern would be if you are sure you can find a buyer after you've done your rehab. That said, you have a few options:

-As Jack said above, hard money is definitely an option you should consider. Yes, it can be risky, but if you use it right, you can really juice your returns. That said, I would try to find a HML who's local or near you, not some company on the internet you are likely to never meet. That's just a personal preference. Use BP and search the forums to find investors who have used hard money around your area and message them, search the forums for HML's or attend meetings (you might have to drive a bit) and network. There's always an HML at a REIA meeting, or someone who knows one. There's probably a private lender there as well.

-Another way to finance would be to use a 0% interest credit card if that's possible for you. Some companies offer promos that give you the ability to take out a certain amount within your credit limit @ 0% interest for a certain length before the interest goes back to normal.  Again, this is risky, just be sure you can pay it off in the time allotted before the promo ends.

-You could also post your deal on BP and see if anyone is interested in partnering up, preferably local or able to meet up with you

-You said that you work for someone who owns a large apartment complex, can you contact the owner possibly and ask for some help? Not sure what your relationship is with the owner, but who knows, maybe it works?

Good luck!

Jack Bobeck · Answer

@Luke Mitchell I found my hard money guys at my local REIA. Always a good source. I do not know about national ones, but I figure they all pretty much operate the same way.

Luke Mitchell · Answer

Thanks for the advice Jack Bobeck! I've seen some bad reviews of DoHardMoney. Are they a legit source or have they earned a bad reputation?

Hard Money or Another Financing Option?

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