This blog post is about becoming a better borrower for Private Lending. Our Central Connecticut Meet-Up hosted Don Vaccaro, a serial entrepreneur of TicketNetwork and RCN Capital. Back in 2010 Don was looking for a place to put his money, RCN was born. RCN Capital Is a featured BP Hard Money lender and Don personally has over $60 million of his own money that he lends out to flippers/rehabbers.
All of these points were taken from the PowerPoint used and expanded with examples. The information posted below belongs to Don Vaccaro and his company, RCN Capital.
This post will allow you to understand what lenders look for in a borrower/loan. This is strictly an educational post. This post is NOT for you to trick yourself into lending. When you borrow money it is YOUR obligation to personally guarantee your debt.
My personal philosophy is that you should not take on debt unless:
1. That debt is being paid by others (netting you a desirable return)
2. Or you forgo income now for a pay day on the back end (netting you a desirable return)
This post will have 3 sections:
1.What do private lenders look for in a loan?
2.What makes a good rehabber?
3.What makes a good business person?
Part 1: What do private lenders look for in a loan?
Exit strategy
Great emphasis on this! (For example, if your exit strategy is cash out refinance. Do you have the required reserves? Tax returns on current investments showing positive numbers?)Much greater emphasis on that than traditional factors like debt to income ratio or credit score. (Hard money can work with lower credit scores if you can show proof why it is lower) 600+ considered decent in HM.
Realistic/Manageable Project
A first time flipper with no real construction background should be targeting a property needing primarily cosmetic repairs. (Follow the K.I.S.S acronym. Keep It Simple Stupid:)Scope of Work. Do you have detailed plans outlining your work? Have you thought out all costs?Safety Cushion Things rarely go 100% according to plan and especially so when dealing with renovations. Borrowers should have a “contingency” line item in their budgets. (Look for the miscellaneous line in BP calculators) Borrowers should not be investing the majority of their savings/net worth into one particular deal and should always maintain some liquidity. (Do you have an extra 10%-20% over your rehab? 3-6 month reserves for primary residence?)Plan for the Worst & Hope for the Best When evaluating a deal, borrowers should know their “worst-case scenario” numbers and work backwards from there (This is how lenders will analyze their deal!) Assume rock bottom sale price and extended holding/listing period – can they still get out without losing money? ExperienceThis can tie into “Realistic/Manageable Project”. Someone with experience knows what he or she can manage. A lender has added confidence on a project if it’s something that a borrower has successfully done in the past. Skin in the GameThere is always a concern about a borrower walking away from a project if things go wrong. A lender likes to see that a borrower is willing and able to put money down so they are literally invested in their projected. Return on Investment Lenders want to see that their borrower is making money (10%-15% return) on their deal.Part 2: What makes a good rehabber? Being a contractor or already having a team
Do you have contact information for a plumber, electrician, etc. that you know and trust? Once you have relationships with your team, it gets cheaper and easier. Most of the time they will help you out. For example: not charge you for walking through a property. They will appreciate the consistent work you give them. Baby stepsReal estate is not a “get rich quick” scheme. KNOW your market and study it; what is the average sale price for a 3-bed/2-bath house in your market? Start with one, manageable property and go from there. (K.I.S.S)Good with numbers To ensure cost of the project stays on track. Basic understanding of an excel spreadsheet will pay dividends when you just start out. Have a business account where everything go’s in and out. (This will help you during tax season) Detail orientedScopes out potential project risks and plans for how to handle them.What if you planned to refinish those hardwood floors but couldn’t get the animal stains out? Did you budget for new floors in your “worst case scenario” column? House SelectionAre you picking houses that first time homebuyers will buy? (Larger buying pool = helps your exit strategy) Hard Money will look for your ability to handle the project. Are you planning on converting a 2 family back into a single family? (For the first few rehabs lenders like to see simple, for the more experienced you must show that you have done those rehabs before or have experience as a contractor) Town SelectionDo you know the area well? Are you local? Have you studied the economics of the market you wish to invest in? This street might be great but two streets over it might be “sketchy”. Know where the line is and WHERE it’s moving. This leads back to you studying the market and the larger economic scale. Appraisal RelianceDoes the appraisal match what you are paying? Know the as-is value and the after repair value. Know your lenders limits. For instance, lenders might not lend over 75% of the ARV. You are the Highest PayerOnce you buy property it is worth less! You have just paid closing costs, as soon as you sign that loan you have already lost money. It is YOUR job to value add. Daily spending. Do you know your daily holding costs? Each day that you waste is a day you do not get back. Part 3: What makes a good business person? Research/Learning
Attending events like the BiggerPockets meet up or other REI Events. Constantly searching for an edge (no matter how small) Jim Rohn said, “Your level of success will seldom exceed your level of personal development, because success is something you attract by the person you become.”Tolerance for riskThere are a lot of “investors” on the periphery who look at properties but cannot work up the courage to make the leap. Take ACTION! Goal orientedThe investor has specific goals in mind when starting a new opportunity. Do you know what you want? What’s your why? Your why is your driving force behind your goals. If your why is strong enough, you will succeed in whatever you put your mind to. Great with follow-up & ConnectedAlways responds to emails, text and stays connected. Delivers bad news first. Most problems can fester and grow if unattended. Respond quickly and act swiftly. Is a people person Relatable and amiable personality. This reminds me of a quote I have on my desk: Two Rules for Making Money1.Never Be Emotional
2.The greatest opportunity for gain or loss come when other people forget rule #1
Integrity
- Is what you say and what you do congruent?
- If your project will lose money, make your investors whole.
Put Business First
Don’t fall for work/life balance. Great question from a lender: Are you working weekends? Know what you’re losing when you take days off.“Relationships and repeat business is everything”Credit ReportIt’s important to know that you are taking care of your credit. This will help you with your exit strategy and obtaining all types of loans. This post is from the viewpoint of the lender and I hope it will shed some light on what lenders are looking for in a borrower.
Comments (1)
Nice blog post, this is definitely some good material that new investors should read when they are getting started. I'm sure there are some that have already gotten started that should be read it too.
Zachary C., almost 7 years ago