It goes without saying that money is a huge part of Real Estate investing and flipping houses. Access to capital, CASH, is key to making a investment property come together. Now, none of this is news to you I am sure, so lets go over how you can get cash for your deals and how it works with investing in Real Estate
Hard Money Lenders
Hard money loans are one of the most common types of funding when it comes to investing in flip properties. Many people are familiar with Hard Money loans but don’t really know what it means. So here is a definition in a nutshell;
A hard money loan is a loan based on the asset it is collateralized against. Although the borrower is important in all loans, this is not the main qualification. A hard money loan will be for a percentage of the asset as it sits right now, current market value.
What does this mean for you as an investor? This means that you will be able to get a loan on a property if you can buy it at the right price and have equity in it. Now the goal is to buy low and sale high, so if you are following this your purchase price should be within an acceptable range for a hard money lender.
Rate and Term of Hard Money
Hard money is not designed to be the loan you keep on a property for a long period of time. They are used in the short term to appreciate the value of an asset, IE Flipping, and then be taken off or sold. Most hard money loans are less than 1 year, but some do go into the 2-3 year time period. A hard money loan for a standard flip would be somewhere between 6-9 months. The rate of a hard money loan is far different from that of a conventional loan. The very nature of the loan makes it far more risky and as such the rates are much higher. Hard money loans are generally between 7-16% APR and interest only loans. Every loan I have ever done has come with points attached for origination, and this can vary from 1-6 points based on the loan and position in the property. Please note, that lenders vary dramatically from one to another so research local lenders when you are looking into investing
You mentioned they will cove “a percentage.” What is it and how is it calculated
The percentage I was referring to in the previous section is generally associated with the purchase price of the home, and in many cases can also included construction costs. Here is how a deal might breakdown;
- Purchase Price- $200,000
- Rehab- $35,000
- ARV (After Repair Value)- $300,000
- Hard Money Loan- 75% of purchase price plus Rehab Cost @ 3 Points and 12%APR for 6 months
Here is the breakdown now on what your loan and payment would be;
- $185,000 dollar loan with $35,000 of this money held back for construction draws (Draws coming up in a minute)
- Points on the loan would be $185,000x 0.03 = $5,500
- Monthly interest= $1,850 interest only
- So when closing the deal you would need to bring,
- $50,000 for the gap remaining
- $5,500 for points
- Closing costs of escrow (Generally ~1%)
What happens if you don’t have the $55,500+ needed to close the deal
There a couple of solutions here that you can look into. The first is to JV, Joint Venture, with a finance partner that could come in with the remaining funds. This would mean that this partner comes in with the cash required to get the job done. They are paid equity from the deal and split the profits with you based on what the agreement is that you come to with them. Many times this can be 50/50 deals if you have a lot of experience and know how to get the job done. If you don’t have experience the risk is higher for the partner and they are likely investing time into the project as well. This would lead to the partner requesting more profit share in the deal. I have done many deals in which I arrange financing, fund the deal and pay a profit share of 10-25% to beginning investors. It allows them to learn and myself to control the money in the deal.
Second option is to bring in a GAP LENDER. A gap lender will finance a
considerable portion of the money left in the deal to make it happen. This means you reach out to them and they help you cover the extra funds needed so you can close. Generally they will not cover the entire portion of cash remaining as they need know you have some skin in the game, so this option is better for someone with a couple deals and a few hundred dollar bills under their belt. The money is generally more expensive as it is more risky to the lender.
Construction Draws… What are they?
Construction draws are what make the world, or at least your job, go round. Simply put a construction is a portion of the loan that you have, that is released to you as you finish work. When you arrange your loan up front the lender will ask for your Draw Schedule. This means, when are you doing certain repairs and what is the value on them. As you complete these items your lender will release the “Draw” associated with it. An example might be;
- Draw 1- Demo complete, rough electric complete, rough electric complete, permits pulled- $15,000
What this means, is that once you have completed these items and received the pulled permit the lender will pay you $15,000 so you can pay your contractors for their work.
Nutshell on Financing
There are a million different ways that you can finance your flip projects, there really are!
The main part of getting a flip is creating something that is worth investing in. There will always be investors for good deals, and there will only be investors for bad deals on occasion, and they will disappear. Work hard, find good deals and you will get the money. If you can’t get the money email me with the deal and I will help you get it or fund it myself… As long as it is a good deal!
****For an in-depth lesson on Raising money For Your Flip CLICK THE PICTURE BELOW
Andrew T Greer
CEO Better Tomorrow Group
Andrew is an active investor, speaker, Realtor, serial entrepreneur, and educator in all that is Residential Real Estate. If you would like a FREE copy of his book follow this LINK. If you would like to follow him on Social media you can find him on Instagram @beastmoderealestate and @bettertomorrowgroup on Twitter/Periscope @TheBTGRoup and Facebook at Better Tomorrow Group.