This is How “Hard Money” Loans Work (Banks for Investors) (Rookie Reply)

0:00What if losing your very first deal isn't the end of your investing journey, but the push you need to win the next one. And what if the perfect market you're searching for is the one that forces you to make a tough choice? Travel to chase cash flow or settle for lower returns in your own backyard? Today, we're answering these questions and breaking down what every rookie needs to know before signing up for their first BRRRR partnership contract.

0:29This is the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. And with that, let's get into today's first question. Our first question today comes from Jeremy, and he says, A few days ago, I lost my first real estate deal. The property had offers from both investors and families who were going to reside in the property. The bank chose the family over investors. I put in an application with RCN Capital for funding on the property. I'm curious as to how someone gets close to 100 % of the ARV for the rehab and all of the other costs. Is that realistic? RCN referred me to another Harmony lender who also gave me the scoop that typically they only fund deals at either 90 % of the value or 65 % of the ARV, whichever is less.

1:10To give some numbers on this deal, he's projecting the ARV to be$150 ,000, but that would leave him with a pretty large gap for rehab, which is, he says, about$25 ,000 approximately. So his question is, on my next deal, can you get some advice on how to approach this? So Ash, there's really, I feel like, two different questions baked into this one question, right? There's one side where it's just questions about hard money lending and best practices there. But the other part of his question and like the title was that he lost, quote unquote, lost a deal. And how can you maybe be more competitive?

1:43So let's maybe attack those two things separately. I think the first thing that I call out is that he says that he lost the deal, but he didn't really lose the deal. It's not like he had it under contract and like something fell apart. He just got outbid by someone else. Right. Well, and it says the bank chose the family over the investors. So like, was this a foreclosure property, too? which which makes me curious because usually I feel like a bank is just non-emotional and just picks the highest but also this could have been a hud house where sometimes there will be a provision where it has to be only someone who's actually going to live their primary residence they have x amount of days to put in offers and then that could be and then it could go to investors and it could have been they got a high enough offer from someone who is actually going to live there as their primary residence.

2:40Yeah. And just to add to what Ashley's saying, so HUD offer, they have like auctions for homes that they've repossessed, foreclosed on, whatever it may be. And you can literally go to like the HUD website. I just Googled HUD auctions and I'm on the website, homes for sale, right? A bunch of single family homes all across the country. So if you guys are ever looking for auction type properties, it is a place to go. But yeah, So it is, I think, a different way of phrasing it. I don't know if you lost on your first deal. But I think we can just maybe briefly cover, Ashley, what are some things that a rookie can do to make their offer more competitive, right?

3:15Because I think that's maybe the crux of this question here, like what he's really trying to get at. And we talked about this before, but there are a few levers that you as the buyer have to make your offer more competitive. You have the purchase price, right? Which is the first thing that comes to mind for most people. sometimes just offering more money, tends to get the deal done. You have speed. How quickly can you close? Sometimes sellers will take a discount on price if it means they can close tomorrow versus a larger price or a higher price that closes in 30 days. So you have speed. You have contingencies.

3:53If someone offers a higher price, but it's loaded with a bunch of contingencies that can make the deal fall apart, there's less certainty there. If you go with no contingencies at the other end of the spectrum, there's more certainty that you'll close. And I think maybe the other piece too is just like your earnest money deposit that could tie into creating more certainty for the seller. If you have a larger EMD, it shows you're a little bit more serious versus a smaller EMD. Maybe someone's like, okay, I'm fine losing 500 bucks versus$10 ,000, right? So those are some things you can focus on to maybe make your deal or your offer more competitive.

4:25Would you add anything to that, Ash? Yeah. The one thing I would add is to like the speed to close, like saying you can close quickly, but also being flexible. So like maybe it is, you know, not in the example of this being a foreclosure property, but maybe it is a family and they're building a new house and their house isn't going to be ready right away, giving the flexibility to close when it's convenient for them. So maybe they want to have it under contract and, you know, to get their contingency removed done purchasing another house, but they want to be able to stay in their house until their new one is done.

5:01So they don't have to pay for a short-term rental, live in a hotel or whatever. So that could also be something if you're able to find out, you know, information about the seller as to why they're selling, what they're doing, what their plans are for the money too. The other thing I thought of was their junk. Leave it. They can leave it. You will take care of it. And this works great for like estate sales or, you know, someone's going into some kind of senior living or, you know, maybe it was a hoarder house and they're just starting fresh. Those are things that it works great to offer that as in like the family doesn't need to do anything else.

5:40You will take care of it. You will unload all of, unload everything and get rid of it. They can take what they want. The rest they can leave. You'll take care of it. That is a huge burden off someone's shoulders. It may seem like it's not a big deal to rent a dumpster and go and throw it out, but oftentimes that's the last thing anybody wants to do, especially after maybe they just lost a loved one and they're selling the property. The next thing is even though you're saying basically I'll take care of everything, leave it, as a rookie investor, especially in today's market, one thing I would not skip is to do the inspection, especially if you have no knowledge or you're not confident in what needs to be done for repairs, still have the inspection done.

6:28And one way you could do it to be competitive is to say that you're not going to ask for anything with the inspection. You just want to make sure that it's going, what you're estimating is going to be correct. So you could say, I'm not going to ask for a price reduction. I just want to make sure that my numbers are correct in what I'm running. So basically it's, it's only there for if you're going to, you know, go forward with the deal. So that does, you know, limit your offer is because you're basically saying, I'm going to back out of the deal. If there's more repairs that need to be done than I essentially thought.

7:06Um, so that can be a negative against you, But I think definitely in this market, you have more wiggle room to add an inspection into your property because I would rather you lose out on a deal than go into a deal that needs way more than you expected. And now you're underwater on your property and over your head and don't have the money to completely finish this property. Couldn't agree more. I know when rates were super low and the market was going crazy, there were a lot of folks just waiving everything. And if you're an experienced investor who's sold a bunch of homes or rehabbed a bunch of stuff in that market, you know it really well.

7:47Yeah, or you're a contractor. Yeah, you're a contractor. But if you're a first-time rookie investor, couldn't agree more. The second part of that question was about the terms that hard money lenders offer. and I think what was discussed here is in line with what a lot of hard money lenders offer. Typically, what you'll see with hard money folks is that they want you as the buyer to have, quote unquote, skin in the game. And the amount of skin relates to how much money you're putting into the deal yourselves, right? Because for them, it's like, hey, if you have nothing in the deal, that's a little bit more risky for us because what incentive do you have to really see this thing through?

8:23But if you've put some money into it, then there's the likelihood or the likelihood increases that you actually want to see this deal through. Every hard money lender varies. And I think oftentimes you'll get different terms based on your skillset. So you'll see hard money lenders quote rookies, complete newbies, one rate, one term sheet, and they'll quote more experienced investors, a different rate, a different term sheet. But typically, they're looking at two things. There's the cost of the deal, right? So your acquisition plus the rehab. and then there's the ARV, right? Like what the property will be worth afterwards.

9:02And he kind of alluded to it in the initial part of his question, but a lot of times they'll look at those, they'll look at those two things and help. And sorry, a lot of times they'll look at both of those things and use to come up with the terms they'll offer to you. So it could be, hey, we'll give you, uh, you know, 90 % of your cost. So if you're buying a property for$100 ,000 and you're spending another$100 ,000 in rehab, your total cost is$200 ,000. They'll say, hey, we'll give you 90 % of your total cost. So they'll give you 90 % of 200 or$180 ,000. That means you're coming up with the other$20 ,000 to get this deal done, right?

9:37That's one way to look at it. They might say, oh, we'll give you 65 % of your after repair value, right? So on that same deal, say that you were all in for 200 and it's worth 300 afterwards, words, whatever 300 times 65 % is. Can't do that math fast enough today. That's what they'll give you there. So those are the two different ways I've seen heart money lenders approach their terms. So I think what he said is pretty in line. Now, I have actually, I've gotten quotes from heart money lenders. I've talked to them before, but I've never actually used one. I've been more of a private money guy or traditional bank financing.

10:10Ash, I know you've used private money at least once or twice before. How do those terms compare to what you've seen? It was the worst experience of my life. I will say that. I used one hard money lender and I did it for, I was supposed to do three deals with them. And then I ended up just paying cash for one of the deals because the process was just so awful. Part of it was my fault for not asking the right questions and for not being fully aware of what the process is and what the fees are. So that was a big mistake on my part, but I did it as I actually did a line of credit with a hard money lender.

10:52And just to have the line of credit and have the money up front, there was a one and a half percent point paid. So one and a half percent of whatever the line of credit was. And then the line of credit was available, but it worked very, very differently than like if my other lines of credit that I just have at the bank. I would be able to get 80 % of the purchase price of the property, 100 % of the rehab that it would need. But I'd have to present to them the property they would do. They would want an appraisal on each of the properties, which isn't always common for hard money lenders, is wanting an appraisal on the property.

11:38So they did an appraisal. And then also I had to submit all my contractor bids to them, my scope of work to them for the rehab, which is common. And then after that, once the project was done, I had to refinance with them. If I didn't refinance with them, I had to pay another penalty. One thing I didn't know was that they will only refinance when you have five properties. So I didn't want to keep paying this. I think it was at the time 10 % interest and wait until I had two more properties with them to actually go and refinance because they wanted you to keep those on the line of credit. And so I actually paid the fee to get out of them and went and refinanced with another bank for a way better interest rate.

12:28So I definitely did not ask enough questions. And it was even my one closing the title. They didn't understand how title works in New York. And we were supposed to close on a Friday. I ended up having to hire a title attorney to try to mediate the situation. And finally, by Monday, we were able to close with a, we told you so, you can't do that here. but still that ended up costing me more money that obviously the hard money lender didn't pay. I had to pay out of pocket to hire that title attorney to basically tell them what to do. And one question I had asked, and they said, yes, we do, is do you work with properties in New York?

13:14And they said, yes, we have done properties there, a ton of them or whatever. But when it came down to it, they did not even know how to close. So I think more specific questions should have been asked and, you know, who actually deals with that. One thing I didn't like also was that there wasn't one central contact person. It was, OK, you're this person for that, this person for this. And it was just too many, you know, hands in the pot where one person couldn't answer questions for me or one person wasn't like my advocate or my representative or, you know. So I really had a bad experience with it.

13:54But that was also a nationwide hard money lender where maybe if you get somebody more local and more, you know, maybe they only operate in two or three states or something like that where they're very niche and specific and knowing how to actually close on a property. But in New York State, it is completely different than a lot of other states do. I have a lender who works in every state except for New York State. Yeah. Every time I see him, I ask him, like, are you guys in New York yet? Nope, nope. even my one private money lender he's not from new york and he always says like oh the new york okay fine one more i'll do new york is tricky but i think you bring up a good point ash of just asking more questions because every hard money lender does operate differently um so for all the rookies that are listening i if you do want to go the hard money route it would definitely be in your best interest to talk to multiple different lenders nationwide regional, local, because each person or each company is going to have a slightly different flavor of how they do it.

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17:11That's why landlords love RentReady. Get your rent in your account just two days. Faster cash flow, less waiting. Need to message a tenant? Chat instantly in-app. No more lost emails or texts. Plus, schedule maintenance repairs with just a few taps. No more phone tag. Ready to simplify your rentals? Get six months of rent ready for just$1 using promo code BP2025. Sign up at the link in the bio because new landlords are loving rent ready. We are here with our second question. So this question comes from Craig in the BP Forums. I'm in Central Valley, California. I've been looking for a deal on and off-market.

17:54The off-market deals are really hard to find. And whenever I do find something and I work my numbers, I can never follow the 1 % rule. I've looked all over the county for deals and find them in a decent amount. But by the time I factor cost of travel to check them out, difficulty of doing reno because I'd I have to drive there with my tools and paying a property management company and also lack of knowledge of the new area. My profits seem to be eaten up. My question is, do I just purchase local since I don't have to pay property management and can do the work myself or out of market and just pay the travel expenses, et cetera?

18:30How do you research a new area you've never been to before? How often do you travel to check out the property? If you travel, how long do you generally give yourself to check out deals, how can you find a reputable agent out of market? Thanks in advance. Okay. First of all, Craig, I really have to commend you for analyzing your deals, factoring in a cost that no one ever does. No one ever adds in their time or their travel to the property. And so just right away, congrats on even considering that because that does add up to what your actual profit is on the deal, the property. The next thing I'll say is don't follow the 1 % rule hard and fast.

19:14Any property, maybe two properties that I've had have exceeded the 1 % rule. Like one was 3.5%, these two or three properties that I've had. And it's like, wow, those must be great properties. No, because they don't fit the 50 % rule because their property taxes are so high that my expenses are way more than 50%. So don't get caught up that just because a property doesn't meet the 1 % rule, that it doesn't mean it's a good deal because it still possibly could be a great deal. You just have to look at all of the metrics, all of the numbers, and not just the 1 % rule. And just to define the 1 % rule, it basically states that as a quick back of the napkin way to check a deal, the purchase price should be represented as 1%.

20:05Sorry. The rent should be 1 % of your purchase price. So if you buy a home for$100 ,000, 1 % of that is$1 ,000. So it should rent for at least$1 ,000 every month. And I think that is getting harder to come by in many markets and probably even more so in a high cost of living area like California. So there's a few questions in Craig's question here, right? So do I just purchase local? That way he can take care of it himself. How do you research a new area? How do you build a team? How long do you travel? There's a few things here. Maybe the first thing we can answer, Ash, is just local versus out of state.

20:46I say this all the time, but I think that decision comes down to what your motivations are for investing in real estate, Craig. I was actually talking to someone yesterday who's looking to get into short-term rentals, and they're a pilot. And he loves being a pilot, doesn't ever want to stop being a pilot until it's time for him to retire. But he's looking to invest in short-term rentals just as a way to diversify his retirement portfolio. Right now, it's all in – he's got, I think, one or two long-term rentals and mostly in the stock market. He's like, I just want some other diversification. Tax benefits are great, but I don't want to quit my job.

21:18I don't even need the cash flow. That is a very different perspective than like me, when I really got started and I lost my job and it's like, we need cash flow today. So I think the motivation that you have to get into real estate investing will dictate whether or not staying local in California makes sense or going to a higher cash flow market makes more cents. If you love what you do and you don't have any plans of leaving and you don't need the cash flow today and you're just looking to diversify, who cares about the 1 % rule? As long as you're net positive, right? With some level of margin, I wouldn't want you to be like zero net profit, but some amount of net profit on an annual basis.

21:57And you're able to invest in a market that's going to, if history repeats itself, continue to appreciate rapidly in comparison to the rest of the market, especially some of these higher cash flow markets, then yeah, staying in your local area could be a fantastic idea. But if you are more focused on cashflow and trying to build that, you know, those multiple streams of income today, then I think that's where going to the other markets might make sense. Well, Tony, I think to the point too, is like, you know, you read the book on out-of-state investing or talk about out-of-state investing. Everyone says like you should be able to do a deal without ever having to go there.

22:30But I think what you and I have kind of learned over the years from guests being on and also you investing out-of-state is at, you know, what's a plane ticket to go to your property? And like, I love that Craig would incorporate the travel costs to going wherever, because if you're buying a$500 ,000 property as your investment, you can buy a$500 plane ticket as part of your due diligence, work that into the cost of the purchase price of the property if you want. But, and you should, I, more and more, I believe that definitely when you're purchasing the property, if you don't have somebody trusted there that can walk through the property and is knowledgeable about the property, then you need to go and be your own boots on the ground.

23:14I would not personally rely on just the real estate agent to be the person to say, yes, this is a great deal. No offense to the real estate agent, but I don't know what their motive is. Is their motive just to close the deal? Is it to really establish a long-term working relationship with me? I don't know. So that wouldn't be like, my trusted resource, somebody who already has a benefit from the property being sold. Tony, even you, you went out to Oklahoma to look at properties in person. You have the knowledge and experience to know what a good dealer is or not, but you still took the time to be the boots on the ground.

23:55And what did the plane ticket cost you to go and do that? It was probably like a couple hundred bucks. I ended up paying for it with points. So I think it was free for me to go technically. But yeah, had I not used points, it would have been a couple hundred bucks for me to you're out there. And I think if you're thinking that's a lot of money for me, then I think you need to evaluate as in, okay, you need to have that amount of money saved, just like you save for a down payment, just like you save for reserves is, okay, I need to know that if I'm going to invest out of state, I need to have those travel costs saved.

24:27So the flight, the hotel to actually go in and check out the market, if you don't have that person, that's the boots on the ground. You can 100 % definitely purchase a property without ever seeing it. Even if it lives, you know, in the, the, the property lives right next to you, you still could buy it without ever going to do it. But I think especially a rookie, just starting out, being able to put your own eyes on it, I think it's a benefit in the area too. So as far as the travel costs of like going to the properties, Tony, how often do you actually travel to the Smoky Mountains or Joshua Tree to see your properties?

25:07Yeah. I mean, ideally for us, it's slowed down a little bit since we've added a bunch of kids over the last couple of years. But previously, we were trying to get out there probably twice a year. Recently, it's probably been about once a year that we go through and check on the properties where we have to travel. Same for the hotel. I've gotten into the hotel about once, a little bit more than once a year, maybe once every like eight months or so. So it's not, you know, I'm not going out there like six times a year, right? It's really just to go there, see where maybe some things are that my team has missed that me as the owner would recognize.

25:39So it's not super frequent that you need to go out there. I think the bigger thing is like if you do decide to go out of state, you know, because he asked like, how do I know which state or which market to go into? How do I know what a good market is versus what a good market isn't. And I think maybe spending more time there first, as opposed to just like hopping on a plane and going and trying to see it. I think there's a lot of legwork you can do before you actually get on that plane to give you a good sense of, you know, is this market actually going to work out for me or not? And again, depending on your goals, there are different things you can look at, but let's say that it's just cashflow.