You can do your first deal with a hard money loan and none of your own money. The catch? It’s really, really hard to find a deal that good. If you truly find a no-brainer, slam dunk deal, the money part should be the easy part. If it’s not, the deal probably isn’t as great as you think it is.
Your first deal really needs to be a home run if you want to keep flipping houses
You don’t need to be an experienced real estate investor to get do your first deal with a hard money loan, but you do have to do your homework. Learn the language of real estate and construction. Be careful and conservative with your numbers and treat your real estate investments like a business.
You need an extra juicy deal to do it with hard money lender and an even better deal if you expect to do it with none of your own money. Lack of experience will eat at your profit quickly and if you don’t have enough “juice” in the deal to weather a few mistakes you could find yourself in trouble.
The top problems hard money lenders see with first timers make are too much optimism on repairs and ARV (after repaired value). Respect the numbers. It’s natural to get excited when you get close to signing a deal, just don’t let that excitement cloud your judgment.
Accurate repair estimates
Most new investors under-estimate repair needs and costs. Unless you have contracting experience, you need a trustworthy contractor (and possibly also an honest home inspector) on your team to help assess the repairs needed and the associated costs. You also need to budget for the time it will take to complete these repairs. Holding costs add up quickly, especially when you use a hard money loan.
The more informed your repair numbers look to the hard money lender, the more likely they are to fund your deal. If your repair estimates are uneducated guesses, you will not get the funding and the lender may ignore your requests until you get more experienced help. Don’t waste the hard money lender’s time with uninformed repair assessments. If you don’t have the experience, find someone who does to help you do your homework. Don’t expect the hard money lender to do it for you.
Most new investors over-estimate the ARV. Without experience, you will need someone to help you determine ARV. Unless you’re an agent, broker or appraiser, you need an experienced real estate agent to help you determine fair market value. You want to use a quick sale, 30-day or less price. This is especially important if you’re using hard money because extra interest payments will eat your profit quickly.
Do I need money to do my first deal?
It’s unusual for hard money lenders to trust new investors on their first deal with no skin in the game and no track record. It’s hard to do your first deal with a hard money loan AND without any of your own money, but it’s not impossible. This is especially true if there are repairs being rolled into the loan, a little less true if you only need purchase funding.
Track records speak volumes, and if you don’t have one, then yes, it’s going to be harder. Don’t let that discourage you – make friends, consider partnering and ask lots of questions. Start small if you have to. People make the real estate investing business sound really easy, which it’s not, but it’s not hard either.
You’re going to make mistakes, make sure you learn from them
It’s important to know your first deal will not go smoothly. If you’re lucky, you might find yourself doing a few “practice” deals before you even close on something. You might lose a few hundred dollars in option fees, earnest money or inspection fees. Consider it cheap education. You can also end up with a very expensive education if you’re not careful enough. Wait for a great deal, but be prepared to learn a few things the hard way.
“In school we learn that mistakes are bad, and we are punished for making them. Yet, if you look at the way humans are designed to learn, we learn by making mistakes. We learn to walk by falling down. If we never fell down, we would never walk.”
-Robert Kiyosaki, Rich Dad, Poor Dad
The hard part is finding the deals
- The red tape for doing your first deal with a hard money loan could consist of a 5 minute phone call to Little City Investments.
- Little City hard money loans have points and a $650 legal fee to our attorney at closing. No hidden fees.
- Talk to sellers, get experience and make friends with other real estate investors to increase your odds of accuracy on repairs and resale values (ARVs).
- We love referrals and we consider partnerships in the central Austin market. You bring us a deal, we bring the money.
- Creative real estate financing is our specialty. Bring us a great deal and we can make it happen.