Today’s REI Classroom Lesson
Ron Carlson explains the importance of finding a general contractor who understands how to work with hard money loans, including having a specific, broken down draw schedule.
REI Classroom Summary
By having the general contractor work with you so that when an inspector comes to see if the work has been done from the draw schedule, it makes getting paid a lot easier and keeps the job on track.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Ron: Hey, my name is Ron Carlson, I am with Renovation Gurus, and today I will be hosting the REI Classroom, and I want to talk to you today about combining your contractor with your hard money company.
Mike: This show is sponsored by passiverental.com.
Ron: This is a problem that I see a lot of times, is when people go into a hard money loan, the biggest thing that I want to talk to you about right here is, you need to rehab your property or whatever you’re working on and then order that you’re going to get paid the most money from your hard money company. What I mean by that is, a lot of hard money companies still have an inspector go out to your property, that they’ll only . . . that they inspect the property to make sure that the work has been done. So when you hire a contractor they have to do . . . let’s just say, they have to paint the home or house and then you as the investor you’ll get your money back for the paint.
So I wanted to just go over what we do to release all the funds or as much funds as we possibly can, so the project continues because the truth is if you shut your money off, you don’t pay your contractor, your contractor will stop on your rehab, your hard money lender is not giving you any more money. You’re either going to have to come out of pocket money, or you’re going to come into a situation that I don’t want to put you in. So I’m going to teach you what we do or what you can do to get the most bang for your buck.
First of all, you need to work with a contractor that’s hard money friendly. What I mean by that is, work with a contractor that’s already worked with a hard money company. There is a way to rehab a house to get more money available for your draw schedule, than you would normally rehab a house on, on a normal contractor basis. So here’s the biggest tip that I want to teach you, and that’s the draw schedule itself.
A lot of hard money lenders will have a preset draw schedule. It’s in an Excel spreadsheet, it’s in a Word document, and that says something along the line of, “Kitchen, $5,000.” But as an investor I want you to be smarter than your hard money company because what will happen is, if you have on your draw schedule, kitchen for $5,000, if your whole entire kitchen is not done and not complete, then you’re not going to get your $5,000.
For example, if you’re missing one knob or one door, or your upper cabinets haven’t been installed, but your lower cabinets have been installed, you’re not going to get any of that $5,000. When the inspector goes, he’s going to say, “Your kitchen’s not done. I’m not releasing this $5,000.” But if you can work with your hard money lender, and I’ve never had a hard money lender tell me we can’t do this, break down that $5,000. Specifically in the kitchen, you want upper cabinets and lower cabinets because it’s possible that you can install the lower cabinets and not have the upper cabinets installed. That way you can get money just for the lower cabinets and not money for the upper cabinets if the upper cabinets weren’t installed.
Break it all down though. Garbage disposal, plumbing, hardware, hinges, door fronts, cabinets, granite, backsplash, window, GFCI. If you break all those down and put the money allotted for them, then when your inspector goes up there and your contractor is a little bit behind. They thought they were going to have whole entire kitchen done, but the granite guy got pushed out, so they don’t have the sink and the granite installed, you can get 70% or 80% of your money, which is way better than getting none of your money at all.
Here is perfect example of what happened to us when we were not hard money friendly. We painted the whole entire house. We had on the paint budget, “Paint,” and it was just $2,500 or something like that. Well, we were remodeling one room, we put the base boards down in one specific room, and the baseboards did not get painted in that one room. So when the inspector came out he said, “Oh, you’re not done painting because just this one room doesn’t have paint on it.” Now we separate our paint like this. Paint baseboards, paint doors, paint walls, paint ceilings. That way if one of those items are not fully painted, we can still extract money from a hard money lender to continue the rehab.
By doing this, you’re going to save yourself a lot of time, a lot of headache. You’re going to be friends with your hard money lender, not enemies with your hard money lender. And you’re going to have a lot much smoother on rehab. Mainly you’re going to save it in interests, and you’re going to be able to move on to your next deal, go smooth.
And that’s the tip of the day. If you have any more questions, you can feel free to call me on my personal cell phone. My name is Ron Carlson, 817-566-4346, or you can check us out at renovationgurus.com
Mike: Passiverental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor, and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.
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