All Forum Posts by: Eric Loya

@Claire D. Good question. It is possible, but depends on the lender you choose. Some lenders may require the private partner to be associated with the loan, others don't care as much.

Your strategy is actually how I started my first investment project. I wrote an article on Bigger Pockets that walks through how I did it.

@Claire D. A simple answer to your question is about 10-20% of ARV needed to do the deal.

There are a lot of other variables, so keep in mind the general structure of hard money loans as well.

Most lenders in today's market will offer a loan structure based on % of purchase price (80-90%) and % of rehab budget (75-100%) with a maximum loan limit of 65-75% of ARV. Expect the lower ratios if your new.

Any amount needed to complete the project (including closing and holding costs) will need to be brought out of pocket and confirmed available in the account funding the deal. Most lenders will confirm down payment available as well as 3-6 months of interest reserves.

@Jamel DaCosta Hey Jamel, tough situation here. Most lenders (including hard money) will want to see the IRS liens paid off before lending. Depending if you have enough time before the sale, you could sell one of the properties that you believe you can recoup the $200k - even if that means selling at a discount to obtain the cash quickly.

With that cash, you can pay off the other liens and still keep the 5 of 6 properties. 

@Sam Nadar Good question! Below are some of the more common questions asked of Hard Money Lenders:

1) What are your rates, and how are they calculated?

- Usually hard money will offer between 7-12% with lower rates offered to those with more experience, better credit, and more capital contributed to the deal. Lenders also vary rates based on state of project and amount of funding.

2) What are your LTV ratios (loan to value) and do you lend based % on resale value or purchase price?

- Most lenders will lend between 65-75% of the resale value, and may offer a variation such as 80-90% of purchase price including or excluding rehab costs up to 100%. Each lender is different, so this is an important question to ask. Another question would be loan amount offered - many will want a deal above $100,000 loan size.

3) What are the origination costs, and other "junk" fees?

- You can expect between 1-5% as an origination fee - also known as points. Other fees may include appraisal, processing, application, etc - so it's good to know these details up front before you decide on a lender based on interest rate alone.

Also, keep in mind if the lender is a Broker or Direct Lender (brokers bring deals to direct lenders and add their fee on top of what they would charge = more expensive for you).

@Manuel Angeles I agree with Nghi Le in his statement above.

Although you have experience on the job site (which may give you an advantage on tough rehab projects) most lenders want to see the number of successful sales you've directly been associated with (meaning on title to some extent). Usually lenders will look at the past 2-3 years of real estate activity and a schedule of addresses you closed on to confirm that experience.

One way to secure better terms is to partner up with an investor who has recent experience. Usually lenders will offer a tiered structure on terms, meaning the more successful flips completed in that time span, the better the rate and points you will receive. By doing so can mean the difference between an 8% loan and 12% - which in California can be a big difference. 

Of course you'd have to compensate your partner, and adjust your numbers accordingly.

@Austin Suddreth your best bet is to conduct the renovations with your capital, get it rented, then do a cash out refinance to take care of student loans and take on more projects.

I say this because it's going to be tough to find a hard money lender to fund a deal under $50,000. Also, most lenders will give you 50-60% cash out refi on as is value, which doesn't do much for you based on the numbers you presented.

When you renovate and get a tenant in there, now you can refi based on repaired value and income generated by the tenant. Usually you can get 60-75% of that appraised value ($80k) with a rental cash out program. You'll get your rehab money back and then some, as well as someone paying your mortgage while growing your equity position on the home as the years go.

Hope this helps!

@Lakshmi Nikitha Duggirala The lender I used at the time did not mind the strategy, however each lender has different parameters in how they approach an equity partner (some want the lender on loan docs, others may not care as much). You'll have to call around to find the lender with the structure your most comfortable pursuing.

My equity split was 50/50 since I didn't bring cash into the deal, was brand new at investing, and had no established credit (20 yrs old at that time). 

Whatever you can work out with your equity partner is completely your call.

@Michelle Bey-Williams As a hard money lender in the space, this is VERY UNUSUAL that they are requesting to be on title. If anything, you should be on title with them to protect YOUR 20% equity stake. Unfortunately, in the past I've made this type of mistake by giving my partner title and just as you'd expect, I was booted from the deal. 

Learn from others mistakes and get some other lenders opinions...

@Lakshmi Nikitha Duggirala Congrats on taking on your first deal! You're on the right track with the idea of leveraging others capital to gap fund the difference of what a hard money lender will require to do a deal. This is how I took on a few of my first flips as well. However, there are some things to consider in today's market.

You'll want to prepare to bring 10-25% of total project costs as a form of down payment (on top of monthly holding costs) to do a deal - especially if it's your first. Most lenders will finance 80-90% of purchase price and 100% of rehab funds up to about 65-75% of resale value.

For example, If a deal is $150,000 with purchase price and rehab, expect to bring $15-$30k to do the deal assuming the loan value does not exceed 70-75% of resale value. Any amount above that % will be required out of pocket by the borrower. In essence, prepare your private equity partner to bring more skin in the game if necessary to do these deals.

@Michael Ede this doesn't seem too off the mark. If anything the representative of the lender didn't properly explain/understand the structure of the loan provided.  The interest reserve is used with lenders when and if they believe you don't have the income to support the monthly loan payments. To protect yourself, make sure there is something stated in the loan docs showing that the reserve will be set aside for the first 6 months of payments.

In regards to the $60,000 hold back, some lenders want to manage the construction process and mitigate the possible misuse of funds. It seems like the lender wants to see 50% or so of the work complete before issuing the final draw.. you may want to clarify.

Hope this insight helps!