There are many ways you can finance the purchase of a home. The most traditional way is with the 30 year fixed conventional mortgage. For investors, a conventional mortgage does not make sense. A few reasons being: the high down payment requirements, fees associated with closing process, time it takes to get approved, and depending on the condition of the property a bank may not even want to finance it. If you don’t have cash an alternative is buying a house with a hard money loan.
A hard money loan is a private loan from a Hard Money Lender, which they front you the cash needed. They should be able to close within a month and provide you the purchase and renovations costs of the property. Typically you’ll pay them monthly interest fees accrued and will not be required to pay the balance borrowed until you sell.
Hard money loans are great for purchasing off market properties. Often times those sellers want to move quickly, and the homes may not qualify for traditional bank financing.
Finding a Hard Money Lender
If you are involved with local real estate investor groups you can ask around to see what lenders other investors are using. You may also search google or biggerpockets for local lenders. I personally used both methods and applied to a few different lenders.
The application process is simple, but be prepared to provide some background information of your experience with investing and renovations. It will be beneficial if you can prove that you have bought a home or had experience renovating.
I had some experience renovating properties when I bought my first house using an FHA 203k Loan. You can read more about that renovation here! I created a short 10 page portfolio booklet that shared about me, relevant experience, numbers, and before/after photos.
After initially reaching out with several lenders, I ended up meeting in person the company I ultimately decided on. We had a meeting to get to know each other and discuss the process further. I liked how small their organization was yet they supported a huge range of project types. We had a great conversation and I was excited about working with them.
How it Works
Typically the hard money lender will require you to put a certain percentage down. I chose to buy Pearl House entirely with cash and then used the borrowed funds for renovation costs. In structuring the financing this way, I only payed interest on what was borrowed as I drew down the money. You will need to have some cash reserves to front the cost of the initial renovations. For me that was about $20k.
After spending about 1/5 of my total renovation budget I requested a “draw” from the hard money lender. They inspect the property to review the work and verify that I had spent the amount of money I was requesting. It works like a reimbursement.
You can request a draw at any point in the renovation process. Be aware draw inspections cost a fee and that once you get sent a draw, then you immediately start paying interest on that sum of money. I chose to divide up the total renovation budget in 5 draws.
Interest Charges
Every month you will receive a statement and be charged you interest fees. My lender collected some of the interest during the draw process so I was not necessarily paying this fee out of pocket each month.
However, as my project slowed down a few months in those interest fees continued to come due and ended up costing more than originally anticipated. The contractors I hired stopped showing up and left me to find new contractors to keep the project moving. This is why it is so important to hire reliable contractors that can get the work done quickly. By the end of the project I was paying more than $800 a month in interest fees.
If you are looking for ways to finance your next deal, I recommend looking into buying a house with a hard money loan! Talk with local investors and don’t be afraid to reach out to different companies.
Would it be helpful if I shared my portfolio booklet I used to apply for the loan? Let me know in the comments!
