Kelly McDonald explains different lending options for first time flippers, including their pros and cons.
While you might be using your own money right now, at a certain point using other people’s money (OPM) becomes the easiest way to scale your business.
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.
Kelly: Hi, I’m Kelly McDonald. I’m the Vice President of Residential Debt here at RealtyShares, and today I’m excited to speak to you first-time financers on everything you need to know about raising your money.
Mike: This show was sponsored by passiverental.com.
Kelly: So it’s not hard to find money out there. If you have experience fixing and flipping properties or fixing the rent or building ground up, you’re definitely going to be able to find someone who will give you some money to do another project. As a matter of fact, you’ve probably done a couple of deals now. You’ve probably joined a real estate group and the only three things you’re hearing are “leverage, leverage, leverage,” from everyone in the group. You’ve probably even noticed that the most successful person in the group has already beyond financing and getting money, so they’re not using their own.
And maybe you’re not using your own money either. A lot of folks start out in this business borrowing from themselves, whether it’s from their IRA or their own savings account. Perhaps you’ve even talked to your friends or family into joining in this endeavor, and everyone’s made a couple of bucks, which is great. But now you and maybe your friends and family realize that if you really want to grow this business to scale, you’re going to need to go out and get some outside funding. And that’s where folks like RealtyShares and/or some additional lender types can really help you out.
Now, there’s a couple of different places that you can find money out there. Your first option is going to be a rich guy who likes you. But let’s be honest, there is not a whole lot of rich guys just laying around who want to give you a couple hundred thousand dollars. It just doesn’t work like that.
Now, your other options are probably going to be a local hard money shop and/or a more larger lender like a national lender like RealtyShares, for example. Now, your advantage of going with a local hard money guy is that he’s on the ground, he probably knows the area very well, he may be be able to go ahead and close you without a whole lot of documentation and maybe even quickly because he’s not going to have to do an appraisal. He’s not so worried about it. And partly that’s because they also have the ability to do what’s called the loan-to-own model, okay? And so, your local hard money guy, because he knows that if you don’t show up and finish the project, he can just take it over and make his money back and he knows that. And so that’s a big advantage that you have and the big advantage they have.
Now, a big disadvantage is that there’s probably some caps in the amount of money that you can get from your local hard money guy. Your local hard money guy is going to have maybe $3 million, $4 million that he can work with, at any given point he can only get so much out the door before he’s got to get it back in the door to give it to someone else. And like any smart investor, they’re not going to put all their eggs in one basket. Whereas with a company that’s a little bit larger, well, they’re going to want to do some diligence, a little bit more diligence at least on the deal, whether that’s having an appraisal done, or checking out that your bank statements are, you know, that you have the money to put down, things like that and reserves in the account.
They’re also going to probably build a fund a lot larger of deals or more deals at any given time. So there’s wins and, you know, losses if you want to call them that, for working with anybody. But the most important thing when you decide to go out and start looking at either your hard money folks or your national lenders like RealtyShares is what type of project do I have and who finances those? So it’s going to be different.
Generally speaking, you’re going to find a lot of folks who are very comfortable with a fix and flip project. They’re not necessarily super-concerned because throughout the project you’re going to have inspectors going out, checking on the work, making sure that it’s actually being done. And that’s probably whether you go with hard money or a lender that that’s going to happen. If you have a rental product and it’s no flip needed, it’s a turnkey property, you might even be able to go to a local bank and get a deal. And if you can, that’s fantastic.
There’s others that are going to be less likely to happen, where you’re going to want to do a ground up project. You’re going to find very few lenders who are super-comfortable with that, unless you have a ton of experience in the ground up and you’ve put a lot of your own money into those deals to make them work.
In the end, you’re going to also need to know about what types of loan amounts these lenders can have. As I mentioned earlier, your local hard money shop is probably going to be limited to a couple hundred thousand dollars per user that they can give, whereas maybe a larger lender can go ahead and do up to $3.5 million dollars like we do here at RealtyShares.
There are also going to be loan limits on the too small side. In fact, when you started out, you were probably, you know, buying your fist couple of smaller projects, you may have already tried to get financing and heard that most lenders don’t like to go below $100,000 to give out, and that’s whether it’s hard money or a lender. In the end, the last thing you are going to see from lenders, hard money and or lenders alike is that we’re going to want you to have skin in the game. Nobody wants you to wake up tomorrow and say, “Real estate, it’s a real hard racket. I think I’m just going to go back to my day job.” Instead, we want you to have so much skin in the game that no matter what you do, you’re going to make sure you go there, and that’s when the down payment comes in.
A lot of folks will try to go out and get 100% financing. It is difficult to find out there. It does exist, but it can come with a lot of different conditions on the back side, where you may have to pay additional profits or fees that you wouldn’t be if you just put a little bit of that money you’ve been spending already into the project that you’re going to get back in three to six months.
In the end, remember that whatever you do, make sure you do your diligence on who’s lending to you as well. Look to build a relationship that will last longer than one project and make sure that you know exactly where the funds are coming from and what are the terms and conditions on repaying them. If you have questions, please give me a call. My name is Kelly, I’m at RealtyShares and my email address is firstname.lastname@example.org.
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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