The Ins and outs of Hard money lender

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The Ins and outs of Hard money lender

Daniel Brown
Specialist · Baltimore, MD · Member since 2018 · 130 posts · 100 votes

Good evening guys and gals! Your favorite newbie here to ask another newbie question. It's the dark side I'm referring to. The ones name that shall not be mentioned. The Hard money lender... duh duh duhhhhh. Ok, enough of my theatrics. 

So some back story of why I'm asking about A HML. I have found a screaming deal. For my first deal. In a really good area with good schools. The price point is 131k. Did comps in the area that come to 310-300. Rehab is going to be about 70k. I have a partner in on the deal that will go half at 100k but I need to supply the other half of the 100k.

My problem. I'm currently doing a live and flip at my primary residence so all of my funds are tied up into this project so I have no capital at this point and time.

I was thinking of using a HML but dont know all the ins and outs that comes with using a HML. Or I could raise private capital but I dont think I have enough time to do it because this property just came on to the market. So if anyone could share their wisdom with using an HML that would be great!

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Dennis Pressey Jr
Specialist · Philadelphia, PA · Member since 2014 · 231 posts · 69 votes
7y
@Daniel Brown If using HML there is no need to come up with so much cash out of pocket. Leverage the cash to put down payment on HML (10% for the best lenders as they’ll lender 90% of purchase/100% rehab funds). He comes out the down payment cash and you front the ‘credit’ guarantees/liabilities - split the back end. Done.
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  • Jarrin Benson
    Real Estate Broker · Portland, OR · Member since 2018 · 31 posts · 22 votes
    7y

    Assume that hard money could cost you around 12% interest (annualized) + 3 points (3% of the total borrow - call it a lending fee). Also assume they will want you to have 'skin in the game'  - which your 100K partner will easily cover. It's usually 20% of the deal that you need to have available in your coffers. Also assume they will want you to be 'all-in' for less than 70% of the After-Repair-Value. These are the high ends of the spectrum of what I've seen and heard of, so if you run your numbers by starting here, you may find something better and you'll be golden. Shouldn't be hard to find these lenders if you have a good looking deal - which you will present in the form of a prospectus. They could ask you to fill out one in their own format, or you could create one yourself (every detail of the deal and your expected numbers). These folks are pretty experienced, so if they don't like the deal, it's worth listening to them.  I hope this is helpful for you to get started. 

    2Reply
  • Caleb Jordan
    Lender · Arlington, TX · Member since 2018 · 465 posts · 184 votes
    7y

    The the dark side will only lend to LLC. It probably will not work for a HML to just fund your portion of deal, they will want both of you on an LLC and then will loan to the LLC.

    Rates will be 14% to 8% depending Ive seen 3.5 to 1.75 points on HML. Rates and points depend on how much $ you are bringing and your credit and experience. You can also do loans for just the purchase and then do rehab out of pocket and that may save costs on borrowing money.

    1Reply
  • Daniel Brown
    OP
    Specialist · Baltimore, MD · Member since 2018 · 130 posts · 100 votes
    7y
    Originally posted by @Jarrin Benson:

    Assume that hard money could cost you around 12% interest (annualized) + 3 points (3% of the total borrow - call it a lending fee). Also assume they will want you to have 'skin in the game'  - which your 100K partner will easily cover. It's usually 20% of the deal that you need to have available in your coffers. Also assume they will want you to be 'all-in' for less than 70% of the After-Repair-Value. These are the high ends of the spectrum of what I've seen and heard of, so if you run your numbers by starting here, you may find something better and you'll be golden. Shouldn't be hard to find these lenders if you have a good looking deal - which you will present in the form of a prospectus. They could ask you to fill out one in their own format, or you could create one yourself (every detail of the deal and your expected numbers). These folks are pretty experienced, so if they don't like the deal, it's worth listening to them.  I hope this is helpful for you to get started. 

    Jarring, thanks for the reply! I know that an HML is going to want me to have some "skin in the game" but what does that actually entail? A deposit of funds? Say 10% of what's borrowed? My partner has his own funds and doesnt want to deal with a HML.

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  • Jarrin Benson
    Real Estate Broker · Portland, OR · Member since 2018 · 31 posts · 22 votes
    7y
    @Daniel Brown you would pool your partners money into an LLC and the HML would lend to that- and your partners money would represent the skin. Your partner doesn’t have an option to not deal with a HML if you are bringing one in on the same deal. They will have first position lien on the property.
    2Reply
  • Matthew G.
    Specialist · Pasadena, CA · Member since 2017 · 133 posts · 86 votes
    7y

    @Daniel Brown Is your partner bringing anything else to the table besides capital? Will he be doing any work on the project? You can talk about adjusting the amount of equity you each get so that he might be more receptive to using a HML.

    1Reply
  • Dennis Pressey Jr
    Specialist · Philadelphia, PA · Member since 2014 · 231 posts · 69 votes
    7y
    @Daniel Brown If using HML there is no need to come up with so much cash out of pocket. Leverage the cash to put down payment on HML (10% for the best lenders as they’ll lender 90% of purchase/100% rehab funds). He comes out the down payment cash and you front the ‘credit’ guarantees/liabilities - split the back end. Done.
    3Reply
  • Daniel Brown
    OP
    Specialist · Baltimore, MD · Member since 2018 · 130 posts · 100 votes
    7y
    Originally posted by @Matthew G.:

    @Daniel Brown Is your partner bringing anything else to the table besides capital? Will he be doing any work on the project? You can talk about adjusting the amount of equity you each get so that he might be more receptive to using a HML.

     Yes, he's done multiple flips and usually does some punch out stuff on the job. So both of us will be managing it at different times. 

    0Reply
  • Daniel Brown
    OP
    Specialist · Baltimore, MD · Member since 2018 · 130 posts · 100 votes
    7y
    Originally posted by @Dennis Pressey Jr:
    @Daniel Brown

    If using HML there is no need to come up with so much cash out of pocket. Leverage the cash to put down payment on HML (10% for the best lenders as they'll lender 90% of purchase/100% rehab funds). He comes out the down payment cash and you front the ‘credit' guarantees/liabilities - split the back end. Done.

    Would it make more sense just to do a conventional 25% downpayment? To avoid paying so much cash out of pocket and use the HML for the rehab costs?

    0Reply
  • Dennis Pressey Jr
    Specialist · Philadelphia, PA · Member since 2014 · 231 posts · 69 votes
    7y
    @Daniel Brown It depends on your timeframe and the rules of the loan. Conventional will typically require ‘owner occupancy’ or a ‘seasoning’ period before you can sell. A rehab loan from a conventional lender will also come with various restrictions. Private lenders are first, followed by HML, IMO. (This is for buy, fix and resell. Buy and holds can work without HML many times)
    1Reply
  • Daniel Brown
    OP
    Specialist · Baltimore, MD · Member since 2018 · 130 posts · 100 votes
    7y
    @Dennis Pressey Jr Thanks Dennis! That actually clears some haze out of the buying process for me. I can see why doing flips, you wanna pay cash or use a HML to avoid these restrictions.
    1Reply
  • Jarrin Benson
    Real Estate Broker · Portland, OR · Member since 2018 · 31 posts · 22 votes
    7y
    Sorry- my original reply should have said pro forma where I said prospectus.
    1Reply
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