Hard Money Loan Draws

[Sarah Robinson]

Hello all,

Ok so I am looking into flipping a house, but I don't have the money so I am probably going to end up using a Hard money loan or a private investor if I can find someone in my area willing to finance. I have been researching and it appears that for HML's I will have to pay for everything up front, and then be reimbursed afterward for the work done on the property (with a fee associated with every draw I pull for reimbursement). How exactly am I supposed to do this if I literally do not have $20,000 sitting in a bank account to do construction projects? If I had the money, I wouldn't be using a hard money loan in the first place. Can someone please explain this to me, please? I'm super confused...

[Jon Holdman]

Even with hard money, it is really tough to do a fix and flip with no cash of your own. My rule of thumb for amount of money you need is that if you have a deal where the purchase plus rehab cost is 70% of ARV, and your HML will lend you 70% of ARV then you will need 15% of ARV of your own cash. If you HML has down payment requirement (many do) you would need that in addition.

That's still a lot better than trying to do with with a conventional loan.  With a conventional loan, you're stuck with a 20% down payment and you're limited to properties that meet the lender's criteria for condition.  And then you have to completely fund the rehab out of pocket.

Hard money is not a miracle.  Fix and flipping is a cash intensive business.  You really must have some cash of your own or from some other source to pull this off.  Other sources might include credit cards, home equity loan, 401k loan, loan from friends or family, selling something, working a second job, etc.