Hello again, I have a question in regards to hard money lender, estimates for rehabilitation and profits.
I have read that if you are utilizing hard money lenders to finance your rehabiltation project, it can be prudent to accept higher repair estimates in order to increase profits? Please correct me if I am misinformed, but doesn’t higher contractor estimates result in the investor being charged:
a) higher interest rates?
b) higher points/loan origination fees?
If we take item (a) and (b) into consideration, how is accepting higher repair estimates or bids assisting the investor in making higher profits???
Any feedback will be gladly appreciated.
Thank you very much for reading this post.
I may be wrong, but here is my thinking and my answer to your question.
You are correct. If your construction costs are higher, you will pay points and interest on that increased amount of construction costs. So let’s say you are paying 3 points. Estimate #1 is $20,000.00 and Estimate 2 is $40,000.00. If you go with Estimate #2, you are going to pay $1200 in points vs. $600 in points on Estimate #1. Plus you will pay the interest on that additional $20,000.00.
What I think others are talking about in terms of getting higher estimates:
What I have done is Front-Load line items. For example if my budget is $50K for the construction, I will keep the budget at $50,000., but I will overestimate the demolition, the subfloors, the framing, etc. This is because if you get more money up front, it can help you manage your cash flow better. This also works because as you are getting to the finishing stages such as with appliances, plumbing fixtures, granite, flooring, etc., you can put those items on a credit card and get the money from the hard money lender before your credit card bill is due. Hopefully this helps. Good luck with your investing. I hope you make $1 million next year…assuming that is a good year for you. If not, I hope you make $100 million. 8)
These are all interesting idead but in realty a seasoned HML will have the rehab draw inspections done by his own employee to catch just these types of ideas. If a charge looks out of line fromthe norm then the HML will NOT approve the full amount. No experienced HML is going to get taken advantage of.
I understand the reasoning behind the desire to have the rehab funds help cover the holding costs but the bottom line is this: Your profit is the amount money you have left after the loan is paid off and your closing costs are covered and you back out any holding costs. The amount is the same regardless of how you try to manipulate the numbers. Why risk your relationship with your lender over a few dollars? Financing your holding costs is NEVER a good idea.
DHLC,
…“financing your holding costs is never a good idea”
I am not disagreeing with you, but really just asking the question(see below). My HMLs do have draw schedules and I am up front with them about everything and they do not have a problem with my set up at all. Maybe it is because I pay the mortgage costs on time consistently.
Even if you have 20% of the project cost in the deal and the LTV is at or below 70% for the lender? I think this is done all of the time, where the money is in an interest reserve. I don’t think it is taking it is taking advantage of a lender at all. In doing rehabs, I think an investor has to have money in the account to pay the contractors quickly.
thanks alot bluechipdc and DHLC for your feedback. Bluechipdc, I appreciate the good wishes that you have extended to me in regards to success in my investments for the upcoming year. Sincerely, I hope that your investments for the upcoming year are lucrative and successful. Thanks again for your prompte responses. Have an excellent day and new year.