Do Private Lenders Fork Over 100% Of The...

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:

the purchase price
the closing costs
the renovation in the back end
holding costs
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.

borrow 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.