So you want to do a rehab. You’ve got a private lender lined up. But how does the lender give you the money for the rehab work? Can you get all the money (to close and do the rehab) up front? Or are those two things handled separately?
Hey Moguls, Patrick Riddle here, and I get this question from investors a lot – and today I’m going to address the answer in detail in this lesson.
Are you ready? Then let’s go.
The Short Answer… and an Exception
With private money, you can structure loans so that you receive all the cash you need to do the deal when you close.
That’s how I’ve done every rehab deal, with one exception: I had one lender who was a little skeptical because it was a larger renovation. So for that particular deal, he wanted the loan structured so that the renovation budget was paid out in three draws.
I don’t remember the exact specifics of the structure, but I’ve always been one who will bend over backward to please the person who is funding the deal for me. I try to suit my investment opportunities to the goals and needs of the investor. So I agreed to his terms. But that’s happened only once.
All Costs Covered
Every other private lender that I’ve ever worked with—and even hard money lenders—whatever cost I needed to borrow was paid out to me. This included enough to pay:
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the purchase price
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the closing costs
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the renovation in the back end
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holding costs
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even marketing costs
Bottom line, this refers to all costs associated with the deal. The private lender will stroke the check and send it directly to whoever is doing the closing.
The lender will not disburse the funds to you, but will write the check or wire the money straight to the closing attorney or title company. At closing, you’ll get the settlement statement and all the rest of the paperwork. You’ll walk out with the check for the balance of the loan after the purchase price and closing costs are taken out.
For the Newer Investor
If you are just starting out, it might not be a bad idea to structure the rehab part of the loan in separate draws.
Borrowing money is serious business and it needs to be treated as such. You certainly don’t want to take those funds from closing and toss them into your personal bank account, then just swipe away whenever, without keeping careful records.
If you do, you could find yourself in a position you don’t want to be in.
My advice is to always be accountable to your lenders. So maybe having a draw system isn’t a bad idea in the early days, so you can show your lender where you’re at with the rehab process. This could turn out to be a good rapport-building method as you begin a relationship with your private lender. Then later, after trust is built, you can ask for all the money at closing.
The Lender’s Take
It’s good to keep in mind that all of this is negotiable. Either of these scenarios is possible, and the lender might consider either option.
I was talking to a private lender recently about this very thing. This lender said if the numbers make sense, he’s willing to write that check at closing and hand it to the rehabber so that they can use it as they see fit. However, this is riskier for him, so he’s going to charge more.
This means the investor is going to pay a higher interest rate and will have to pay more in points with this lender.
Whereas, the lender will charge a lower interest rate and fewer points if the investor is willing to set up a draw system and let the lender be involved in deciding when the draws are made, based on certain milestones in the rehab project.
Summing It Up
So there you have it…
The main thing to remember is that your private investor is a valuable member of your investing business team.
Learn what works best with him/her and strive to keep the relationship on good terms. You want this relationship to last for a long time!
Your Take
What are your experiences in structuring loans with your private lenders? I want to hear from you. Leave a comment below!
1.
Talk to your private lender about their preferences for lending on rehab projects.
2. Build rapport with your lender by starting out with a draw system.
3. Be mindful of the interest rate the lender will charge if they give you all the money up front.
Patrick Riddle
has been investing in real estate ever since he got the bug in college at Clemson University and - to his parents dismay - dropped out of college to dive full-time into real estate at the age of 22 with a couple friends/partners from school.
The first few deals were rough for them, mainly using their own cash, credit, and hard money loans. But, soon he found out that was a rough and unsustainable way to build a real estate business.
After "on the job" learning through the school of hard knocks at first, he found the key that helped their company get deals done more quickly, with higher profit, less risk, without having to go to banks or use their own cash.
Fast forward to today, their company has closed over 130 real estate transactions and has put over $6 million in private money into their own transactions.