​How I used a Hard-Money Loan to make $100,000 (plus) – A Case Study

Whenever the subject of Hard-Money comes up, people seem to have a very hard lined opinion of the topic. I feel like there are the “I would never pay those rates” type people who would rather have no deal than have to pay a Hard-Money Lender double-digit interest rates. And on the other end of the spectrum are the people who seem to use Hard-Money Lender on a regular basis and love everything about the process. So, while my opinion falls somewhere in the middle of those, I’d like to tell you about how I used a Hard-Money Lender to make $100,000 plus on a property.

Finding the Property & getting it under contract

This deal began in April of 2011. While my wife was at home with our 2 week old daughter, I was out looking for our next investment deal. One of the properties that I was schedule to see that day was a 2-Unit corner property in the Fishtown section of Philadelphia. The property was an REO sale and was of particular interest to me because of it’s location, Fishtown was in the beginning stages of a huge revitalization, and because it was a multi-family that needed a full rehab. At the time, it seemed like Multi-Family properties were moving slow. Who am I kidding, it was 2011, EVERYTHING, was moving slow. Anyway, the property was listed for $165,000, with what I assumed to be an ARV of around $200,000. So for that price, the number just didn’t work.

From April, until our eventual settlement in the middle of September 2011, I had submitted 5 offers on the property. Each time I submitted an offer, the REO specialist responded that they would not accept my offer, until finally it happened, we agree to buy the house for $100,000 and they agreed to sell it to us.

The Inspection Period & Estimation Phase

I’ve never signed a contract that does not have a contingency for an Inspection and this house was no different. Although I knew going into the deal that I was going to be replacing all of the mechanicals, the plumbing & updating some of the electricity, I still used that opportunity to have an inspector check on the structure & the general condition of the property. I also used that time to have my General Contractor, Electrician & Plumber inspect the house to get true estimates of the work that we were going to do. During that time frame, someone must have broken into the home to steal all of the copper because I showed up at the house with my plumber & you could imagine our surprise when there was no longer any electricity in the house. Yep, somebody stole every visible inch of copper wire that they could get their hands on. I could only assume that making these cuts was fairly dangerous for the small amount of money that the copper would scrap for. But, now it was time for me to go back to the bank and negotiate. I asked to bank to compensate for the stolen electrical wires, since the house had fully operable electricity at the time when we signed the contract & they agree to give back $3,000 at settlement to compensate for the loss.

The Financing

Based on the condition of the property & the time-frame that we wanted to settle, we decided that Hard-Money Lenders would be the best option to fit out needs. The Lender that we chose offered 65%ARV (After-Repair Value) to include the cost of purchase & repairs, or a total Loan amount of $133,000. I would be required to pay 5 pts at closing & also bring my first month’s payment to closing. The interest rate was 13.9%. We had to bring $8,190 to settlement for the Lender. The total amount due at settlement would have been $12,000, but since I was getting $3,000 back at the table from the bank, we only had to bring $9,000 to settlement. The terms were for 12 months, so we had to move quick to sell or re-finance the property.

Our plan was to rehab the property for $33,000. Once the property was completely renovated we would be able to rent the 2 units out, which would be enough money to clear all expenses (including that hefty 13.9$ interest-only payment). Once we were seasoned in the property for 6 months we would refinance it into a conventional 30 yr loan

The Rehab, Rent & Refinance

The rehab didn’t go exactly as planned (do they ever), but it was very close. We completed the renovations and had the property listed for rent within 4 months, just about 1 month behind schedule. We also put about $5,000 additional out of our own pockets (making us about $14,000 into the deal).

We were able to get good tenants in place by the middle of February 2012, just about 5 months after our original purchase date. The 2 units rented for a total of $1,600/mo with the tenants paying utilities (except water). So now we had a fully rented building with 2 rents that was basically at a tight “Break-Even” as far as cash-flow is concerned.

Our bank insisted that we needed to have at least 6 months of seasoning before we would be able to apply for a refinance. We finally settled in the first week of May on our refinance. Based on the actual appraisal we were able to refinance into a conventional loan with a 4.625% interest rates for $133,000. This allowed us to pay back the Hard-Money Lender & significantly decreased our monthly debt-service. That’s when something magical happened. All of a sudden, this property that had been a lot of work over the last 6-months turned into a cash-flowing investment. The property then began to clear around $500/mo, or $6,000/yr. That’s a pretty ROI for a $14,000 Investment.

How is that Property doing today?

Fast forward to 2016 and we had been fortunate to have great tenants in that property. The neighborhood has continued to increase & so have the rents. The 2 units now bring in a total of $2,025/mo and are clearing approx $750/mo. We recently did a cash-out re-fi and were able to get all of our money back (the $14,000) plus an additional $16,000. And during that cash-out re-fi, the property appraised at $245,000.

After going through that process, I have a true understanding for the value of Hard-Money Lenders. Now that I have more experience I would prefer to utilize Private Money for future investments like this, however, in this case the numbers worked and without the help of our Hard-Money Lender this deal would not have happened.

I hope this helps you understand the process a little better!