Finding Money, Hard Money

Ya, so how am I going to pay for the new project? The closing date has snuck up on me.

In California, it takes $2m-$5+ to put together a project, which requires raising money from investors, as well as taking out a loan (unless you’re someone that just has that kind of money lying around). The good news is that in TN, the project costs are somewhat affordable, so a loan will suffice. However, I don’t have any lenders in Tennessee. At this point, I have decided to use a private lender (or hard money) for several reasons that I will get into in more detail later, generally: 1) inconsistent tax returns, 2) limited working capital, and 3) ease of completion of transaction.

I started by asking my California lenders if they have any loan programs in TN, but unfortunately, they do not. California is apparently it’s own beast. I used a good resource to start with: Bigger Pockets Investor Forum (Bigger Pockets). It seems to weed out some of the sketchy characters that are associated with “hard money.” To start, most lenders have claims like: 90% of purchase price, 100% of construction cost, which means you only have to come up with 10% of the purchase price. This, to me, sounds extremely unrealistic, and it usually is once you start speaking with them. So, I called around 10 lenders, and listened to their program after telling them the general parameters of my project. There is usually a bit of paperwork to fill out about the project and your experience, but after they review, they get back to you with what they can offer (which is usually not the terms they start out with). I was also introduced to one local lender through a family friend, that expressed interest in my project.

Currently, I have narrowed down to two firms, based on their terms, and generally how “legit” they seemed after speaking with them:

1) Chicago-based– offering best rate, but have to come up with 20% of total project cost, very persistent about following up, and very professional.
2) the local guy– higher rate, less $ down at 10% of total project cost, more “hand-shake” business practice

I have a lunch scheduled with the local guy, which is an added plus; he is able to see the project and approve billings quickly. There is added trust because of the personal relationship. At this point, both firms are doing their due diligence.

Development Takeaway: Finding money is the most important part of the project, high rates eat into profit and it’s worth it to find the right people to work with. It is important to find lenders you can trust, and it’s always good to have a back-up lender in case one falls through or can’t perform at closing (this has happened to me!).

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