On this episode of What is the Deal, the real estate podcast that gives answers, we’ll be covering what is the deal with hard money lending. One of the most common finance tools in fix and flip real estate is hard money.
Joining me to lend some knowledge on hard money is my good friend and colleague, Brandon Moulton
Who are you and what do you do?
For the people that don’t know, what is “hard money”?
What does a day in the life of a Senior Vice President of Lending in a hard money lending firm look like?
Why should a real estate investor use hard money?
What are the decisions someone will be faced when choosing a hard money lender?
How would you advise someone to choose the right hard money lender?
What is the most common mistake you see real estate investors make when it comes to utilizing hard money?
On the flip side, what is the most common mistake you see lenders make?
What advice would you give a real estate investor looking to utilize hard money for the first time?
What advice would you give someone considering starting a hard money lending company?
What can a real estate investor do to make themselves the most attractive borrower possible to a hard money lender?
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Fernando Angelucci (00:04):
All right. Hello everyone. Welcome on this episode of What's The Deal, the real estate podcast that gives answers. We'll be covering What's The Deal with Hard Money Lending. One of the most common finance tools in fix and flip and buy and hold real estate is hard money. And joining me today to lend some knowledge on hard money lending is my friend and colleague Brandon Moulton.
Brandon Moulton (00:30):
Thanks Fernando. Excited to be here. Was that pun intentional?
Fernando Angelucci (00:36):
It was intentional.
Brandon Moulton (00:40):
Love it. So yeah, excited to be here crazy times election is hanging in the balance right now as we speak on the fourth year, but you know, excited to talk deals.
Fernando Angelucci (00:53):
Cool. So to start it off, why don't you tell the people watching, you know, who are you and what do you do?
Brandon Moulton (01:02):
My name is Brandon Moulton senior vice president of lending here at Renovo Financial. What I do is I work with residential real estate investors to help them execute on their business plan, whether it's flips or buy and holds. And then are the asset classes we focus on are anything from a single family up to a 50 unit apartment building and everything in between.
Fernando Angelucci (01:32):
Awesome. Okay. So you said that you guys help people out, both on the buy and hold side and on the fix and flip side. Can you go into that, explain to people maybe that might not know what hard money is, what is hard money and how's it different from other say traditional financing sources?
Brandon Moulton (01:52):
Sure. So hard money is really just private money for the purposes of the acquisition of real estate. It's tends to be more focused on the asset. And there's more of an understanding we'll say that comes along with each borrower and each age project that maybe doesn't fit into the box that the traditional outlets like conventional lenders would like to see. So and then typically it's, short-term usually 9 to 18 months is the term that you're looking to turn the money in, and either re-fight or sell the property.
Fernando Angelucci (02:38):
Okay. And during that nine to 18 months, is it amortize? Is it interest only?
Brandon Moulton (02:44):
Typically interest only, but that can depend on each deal and what you cut with that group. Some guys like to see pay downs after, you know, some period of time, but typically interest only.
Fernando Angelucci (03:01):
Okay. you said that hard money is usually utilize more when conventional financing sources aren't viable. What are some of those? Give me one or two situations where using hard money would be preferred over, say using a bank.
Brandon Moulton (03:18):
Sure. So you know, for, from a hard money perspective, it's typically an asset that is in some state of disrepair. Meaning it needs to be turned around value add whether it's re-zoning or just construction. When it got out the building banks are, you know, and conventional outlets are lukewarm on it. Especially depending on the size of the dollars, they all love the million, million plus that's what gets them out of bed. But for those dollar amounts, less than a million it's a lot of work. It's not something they really gravitate towards. They want the deal with the bow on it at the end where it's stabilized, but the the heavy lifting within the construction period is something that can be a little bit challenging within the conventional world.
Fernando Angelucci (04:12):
Yeah. Now with hard money, you said that it's a more of an asset based loan. When you say it's an asset based loan, what does that mean? As opposed to what?
Brandon Moulton (04:24):
So asset-based meaning looking at the collateral, focus is initially on the project plan. And then there's, I would say there's some understanding around the personal background and maybe there's some bumps in credit in the past, but really the focus is on the actual hard asset.
Fernando Angelucci (04:45):
Gotcha. Okay. Now, so you said that you're the senior vice president of lending at Renovo. What does a day in your life look like? What are you doing on a day to day basis? Maybe it changes a lot. Why don't you give us a little bit of detail into that
Brandon Moulton (05:01):
You make it sound so grand, it just means I have more phone calls and text messages. But you know, it's a lot of conversations kind of like what we're discussing now in terms of, you know, how the loan works what the cost is loan to value, but that's kind of the initial onboarding conversations. And then once you know, we've got a history, it starts to become more about what your business plan is and how we can go to the next level. Right. and then also how we can potentially leverage my network of other professionals to help you get there.
Fernando Angelucci (05:43):
Gotcha. So it's a lot of business development. You're talking to investors day in, day out, maybe it's helping them source contractors, attorneys, wholesalers. I know you've connected us with a lot of your clients in the past, and we've been able to help them out with sourcing properties as well. When it came to Renovo, give us kind of your history. How did you get there? How long have you been there?
Brandon Moulton (06:09):
Yeah, so I initially started my career in finance with a bank, a local bank doing underwriting for construction deals and different real estate opportunities. I did that for about seven years and then I was doing some light rehabs myself and got my brokers license and really kind of saw this as maybe a potential path that I wanted to go on and as a developer, but I was introduced to the guys here at Lenovo and you know, really haven't looked back since I started as a loan officer and kind of worked my way up the totem pole here. So but yeah, I mean, it's been a great run. You know, the economy has been phenomenal and then there's also just been more confidence in the idea of private money or hard money lending here recently.
Fernando Angelucci (07:05):
Yeah. One of the things that I've noticed is, you guys are very quick to close deals. I've heard from multiple of my buyers that when they use you guys, you guys can usually close in, you know, usually 14 to 21 days. In some cases you've done it even faster than that. I'm not not saying that every deal is like that, but usually when when a borrower has all their information buttoned up, they already are in your system. It seems like you guys can close pretty quickly. When should a real estate investor decide to use hard money. One of the reasons I'm alluded to right now is obviously speed. What might be another reason to use hard money?
Brandon Moulton (07:47):
Yeah. So I would say there's really three primary reasons. One you just touch on, which was speed. Two is a dilution of partners. So within private money, we're willing to go higher advancing, advance higher into the capital stack so that you have to take on less partners. I think we talked to a lot of folks and it gets pretty old pretty quick. When you're the one finding the deal running around, chasing the contractors and then selling it and maybe your rich uncle put up all the money, but you split it half at the end that it kind of gets old after you do it a couple of times, given the amount of work and how hard it is to find these projects and then bring them to completion. And then the third I would say is real-world underwriting. So there's a more understanding around kind of maybe, some lumps in your credit or maybe your tax return you're self employed. So it doesn't look, you know as the way a bank would like it. So just having that general understanding and the ability to have the conversation, I think, is a big driver of why folks like to use private money.
Fernando Angelucci (09:00):
Yeah. I know when we were flipping properties, one of the things that was always tough, especially in the beginning was when we went to a local bank, they wanted 25 to 35% down of the purchase price. And then anywhere from 50% or more of the rehab, we had to fund ourselves in some banks even quoting me that I had to put all the rehab dollars. And so that's a lot of cash out of pocket. Say, you have a prime plus borrower, everything looks good. He has decent credit, you know, good experience, you know, what can they usually look to be putting down on both the purchase side and on the rehab side?
Brandon Moulton (09:38):
Yeah. So we look at the deal on a total cost scenario of what your acquisition cost is, and what your rehab cost is. And then we would be funding somewhere between 80 to 85% of that total cost. Meaning you'd have to come in with a 20 to 15% down now, pre COVID, we were going up to even 90. I'm sure we'll get back to those days at some point, but we're not there right now. So 15 to 20% of the total costs is what you can expect for somebody that's got some experience and some, a good track record.
Fernando Angelucci (10:18):
And then as far as ratio to let's say total ARV, what's kind of your guys as stop limits as far as how far you'll go up on a deal?
Brandon Moulton (10:28):
Yeah. It's a pretty straightforward between 60 to 70%.
Brandon Moulton (10:32):
Okay. And that's.
Brandon Moulton (10:34):
Make sure there's on the back end so that you can get out of it and move forward.
Fernando Angelucci (10:42):
Yeah, absolutely. So, you know, a lot of people that are watching this video and a lot of people that we work with, they always like to utilize hard money lenders and there's, you know, the space has been getting crowded recently with the amount of cheap money out there, funding these hard money lenders, someone's going to select a hard money lender. What are the decisions they are going to be facing? What type of things should they be looking for from the hard money lender to just almost like verify or vet that lender?
Brandon Moulton (11:13):
Yeah. So about five years ago, you touched on a point here that it's become a pretty crowded space. Goldman Sachs bought a group out of California Genesis, and that really legitimized kind of the industry, so to speak. And since then it's been like you said, a pretty crowded space and competitive, but you know, when choosing a hard money lender you really got the option of kind of national versus local, right? So the national guys are all backed by wall street. They're typically going to be a lower cost or lowest cost provider typically, but it's still very much check the box even for hard money. And you know, you're still gonna have to kind of meet their ratios and kind of check the boxes. I said and then you've got local guys that can provide some more flexibility, speed, know how due to their local knowledge expertise and probably just being a little bit more nimble and not as bureaucratic. And then you've probably got another kind of layer of it. That is probably just, you know, a guy that's got a few million bucks that can kind of write a check on site and take a mortgage on the property. So those are the kind of the three options I would say. So you've got to kind of balance out how your deal fits in into each bucket and what makes sense. And that timing also plays a role into it as well.
Fernando Angelucci (12:55):
Yeah. And I want to touch on a few points you had there. So the first thing is with those national guys, what I've noticed is the underwriting is very similar to if you were to go to a bank. So the speed is not usually there compared to say a local guy. And the underwriting is pretty onerous compared to say somebody that knows a local market. The second thing I wanna to touch on is, again, the importance of going with a local lender that knows the investment areas here in Chicago, in the areas that are primarily sought after for investment purposes. A lot of those areas are almost block by block and someone that is not headquartered in the area that you're investing in may not know that, Hey, if you cross the street, all of a sudden the after-repaired values jump up a hundred thousand, or if you go on the other side of this park then all of a sudden you're in a completely different area, even though on a map, it looks like it's right next to it.
Fernando Angelucci (13:53):
But if you actually know the local area, you'll start to see those changes. And that's huge for us investors because we're always trying to invest kind of on the borderlines, right? Where a class A area bleeds into a class B areas that you can buy at class B prices, rehab it, and then sell it at class A prices or C to B, what have you. So those are the two things that I noticed. And then the third thing is you touched on these what I call these mom and pop hard money lenders, right? It may be just some high net worth individual. It's just him sitting behind a desk and he's just turning his money over and over again. What I've noticed with those types of guys is they usually get tapped out pretty quick, and they could only have a couple loans going at any given time. So if you were relying on someone like that, you can get caught holding the bag with a contract that you're not gonna be able to fund. So talk to me about Renovo, give me an idea of like how you guys are funded and how much available funds you have. Every time I've talked to you, you've never had any issues with funding deals. You've never had any issues w with finding the money for a property.
Brandon Moulton (15:04):
Yeah. We've taken a little bit of different approach to kind of the game here. And it's really taking the blend of local expertise and kind of having that community banker understanding and know-how, but kind of cross-pollinating it with an institutional platform and the capital structure behind it. So definitely a little bit unique in that regard that we have the flexibility and of the, of the local guys, but with the the backing of the institutional guys.
Fernando Angelucci (15:40):
Yeah. So yeah, I'm glad you kind of covered some of those things. So let's switch gears here and now let's talk about the borrower themselves or the insurance themselves. So, you know, hard money is a great tool if you know how to use it well, but it can be a pretty disastrous tool, if you don't know what you're doing, you know, what are some of the most common mistakes you see real estate investors making when it comes to utilizing hard money?
Brandon Moulton (16:12):
So there's a few I'll touch on here. I would say, starting very big and in terms of construction budgets, and then maybe municipalities that they're not familiar with. I mean, here in Chicago you go to Berwyn some of the other local municipalities, they have different requirements, and they can really jam you up on inspections and stop work orders, et cetera. And if you're not playing by the rules of the game you can really find yourself you know, tied up with a hard money loan or private money loan. That'll just really chew away your profits. So know your municipalities inside and out, I would say start with a smaller budget, especially out of the gates. And you know, those bigger budgets and those luxury class A stuff could be very dangerous. Cause if you don't make the market time, you could be sitting on that for quite some time and really just getting chewed up like I said, so. Budgets and municipalities are the two biggest pitfalls I see.
Fernando Angelucci (17:28):
Yeah, absolutely. And one of the things that I've noticed especially on the municipality side is when investors are trying to game the system. So I've seen some pretty nasty deals where the investor tried to avoid pulling permits, the municipality found out, and then all of a sudden they get a stop work order. Now they can't do construction for, you know, six to nine months until they remedy this. And that's, you know, six to nine months of hard money. That's a lot of interest to be paying. Another thing that I've also seen is the timing of the market like you alluded too, you know, in Chicago, we have pretty severe winters and the real estate activity from buyers from end buyers, homeowners drop significantly during the wintertime. And so does prices usually see a 5 to a 10% drop in prices across the board during those times.
Fernando Angelucci (18:18):
And I've seen some larger projects that the scope kind of exploded a little bit. The construction took a lot longer and all of a sudden now they're listing in winter as opposed to trying to list early fall, late summer, that has caused a lot of issues. So yeah, very, very important things to watch out for one of the nice things I like about working with you, Brandon, is you're not only a lender, but you're almost like a third-party advisor. You come and you help them with their scope. You tell them, Hey, I don't know if this timeline's really making sense. How can we tweak this to make sure that you're geared, you know, cause you're always looking to have your clients perform well, the last thing you want to do is take a property because Renovo's not in the business of owning property Renovo's in the business of lending capital to successful real estate investors. Right?
Brandon Moulton (19:06):
Yeah.
Fernando Angelucci (19:07):
So.
Brandon Moulton (19:07):
So yeah, I mean, I work you know, having, you know, writing hundreds of these deals over my career kind of seeing, you know, how these these deals go and what to expect and you know, what budgets are appropriate given what their plan is. And also asking if they've rehabbed and places these different municipalities to make sure they're aware of all the requirements and which ones are particularly tough. So, like you said, we're looking to get in and out of these deals, want to have a successful track record with our guys and, and continue to turn the money and help them hit their goals, plain and simple.
Fernando Angelucci (19:50):
Yeah. So one of the things that I've also noticed just because we have buyers that always ask for referrals and a lot of these buyers already coming from a previous hard money lender that made some kind of mistake and then have gone over to work with you guys and stayed with you. What are some of those common mistakes you've seen your competitors make, which has caused business to migrate from them over to you guys?
Brandon Moulton (20:18):
I would say the, you know, the biggest one, you know, they can lend folks into a problem when they're really they don't have those conversations and if they fit the box, so to speak on paper you know, maybe it doesn't actually makes total sense and then they can get guys into a couple more projects than they should. And then that creates friction long term, and then an opportunity for us. I would say other piece is over promising and under delivering especially on timelines, that's a big one thinking they can get it done and they can't actually get it done and for any variety of reasons. And then the third is there's, you know, with the national guys, there's just things that happen on wall street or from these institutional players that back them that they might just say, Hey you know, if your budget is more than 50% of your ARV, we can't do it. Or if your purchase price is 50% less than your budget, that's just a hard no. So they start to run into those kind of hard no's in the box type lending scenarios.
Fernando Angelucci (21:36):
Yeah. So we've seen you know, the market's been really great for real estate, especially even going into COVID. And I think the main reason for that is there's just low inventory. There's just no deals out there. Same thing on the flip side for the homeowners are I'm seeing ARV is going up because of the low inventory. I don't think that's going to last very long. But because of that, I have you know, a lot of newer investors jump into the space, start to look to leverage their money and start looking at utilizing hard money. So what's some advice you'd give to say a newer real estate investor looking to utilize hard money for the first time.
Brandon Moulton (22:19):
Let's talk, let's have a conversation about why we're doing this, And really make sure we're in it for the right reasons. And it's not just a good thing to discuss at a cocktail party. But that you're actually really ready to live in breathe. You know, what this takes to get done, because fighting with contractors, finding properties, passing inspections, isn't for the faint of heart, by any stretch of the imagination. So you really gotta have a good team around you to get through it initially. And I think it starts with you know, a good real estate broker, a good contractor in particular that can make or break you. And then you know, from there, if you're willing to, you know, continue to take the next steps you know, we've got some to talk about, but a real solid team is what it takes to get you off the ground here.
Fernando Angelucci (23:15):
Okay. So real solid team, that sounds like it's super important. What type of pre-work can an investor start doing to make themselves more attractive as a borrower to say, Renovo what things can they be doing with, you know, reserves with credit, with finances, those types of things.
Brandon Moulton (23:40):
Well, for the new guys, know your numbers, it's a really disappointing conversation when somebody tells me, Hey, I want to get into real estate. And then you start to ask them, you know, what do you look like on paper? What, you know, what do you make annually? And they say, well, I don't know, what do you have in the bank? It depends on the day. Those types of answers are just not going to fly well. It really makes a call short in my opinion, because if you don't know your numbers, I'm not going to know them either. And you should be looking at us as the lender, as your biggest investor. We're going to be putting up over 80% of the money in some instances. So come prepared and have a good business plan.
Brandon Moulton (24:27):
And you should also be seeking out mentors and folks in the industry that are actually doing these types of deals. And maybe you can start, you know, as an equity investor putting into their deals so you can shadow them and, and kind of see how things work. And then the second piece, I would say to start to you know, run a lot of the different scenarios on different deals and track your neighborhoods and what your business path could look like. And then start to talk with maybe friends and family on the first deal. So there's a little bit less pressure going into it. And your first deal. So friends and family is a good way to get started. I've also seen people, you know, buy a property and use a two or three K loan to get started as their first flip or buy conventionally and then fund the construction out of pocket. That's how I did my first flip. So there's a lot of ways to do this. If you've got the grit and really wanna kinda make it happen.
Fernando Angelucci (25:33):
Yeah. So, okay. So it sounds like to summarize, get a good team around you.
Brandon Moulton (25:39):
Yep.
Fernando Angelucci (25:39):
Make sure you have a solid business plan and, you know, your markets have a little bit of experience before you come to a hard money lender and then make sure that your numbers are buttoned up on the financial side. What do you usually like to see as far as reserves? What do you like to see as far as, you know, tax returns, the adjusted gross income? What are those types of things look like?
Brandon Moulton (26:00):
Yeah. So from a liquidity standpoint in cash or cash reserves, that's going to weigh pretty heavily in the conversation. Because inevitably during the process of rehabs and construction, there's always something that happens or comes up and, you know, you're going to be expected to step up and, and typically fund that difference. So we want to see a minimum on post after your down payment of a minimum of six months of reserves or 50 grand.
Fernando Angelucci (26:33):
Is that interest reserves only, or is that what types of reserves?
Brandon Moulton (26:37):
So when I say reserves six months of your like what shows up on your credit report as far as your monthly obligations.
Fernando Angelucci (26:45):
Okay.
Brandon Moulton (26:48):
So your house, your car, credit cards, whatever it might be, we want to see six months of that and minimum.
Fernando Angelucci (26:54):
Okay. And then at least maybe $50,000.
Brandon Moulton (26:57):
Yeah. You're going to need it. The worst thing I can do is lend you into a problem that you can't get out of. And then you're scrambling mid project to be able to cover any shortfalls, et cetera.
Fernando Angelucci (27:12):
And these are a lot of the things that you cover when somebody first reaches out to you and starts getting started with the process with Renovo. Right?
Brandon Moulton (27:20):
Absolutely.
Fernando Angelucci (27:22):
Tell people then, you know, how can they reach you? And is there anything they should know before they try to contact you
Brandon Moulton (27:30):
Pretty straight forward. I got my phone with me you know, 24/7.
Fernando Angelucci (27:36):
I know it.
Brandon Moulton (27:38):
You know it. But I can be reached at www.Brandon@RenovoFinancial.com or my cell phone, which I can give Fernando to post later and feel free to either shoot me an email or a text, and we'd be happy to get a call scheduled with you. And see how we can make it work.
Fernando Angelucci (27:58):
Great. So www.Brandon@RenovoFinancial.com and they can also go to www.RenovoFinancial.com, Is there a way if they go to the website that they can say, Hey, I want to talk to Brandon.
Brandon Moulton (28:09):
Yeah. So there's a, if you call in to our the phone number provided online. Jess would be the one that takes the calls in and she'd be able to direct you guys to me.
Fernando Angelucci (28:25):
All right. Perfect. Well Hey, Brandon, I really appreciate you coming on, taking time out of your busy schedule.
Brandon Moulton (28:31):
Same to you.
Fernando Angelucci (28:33):
I know you have a little baby at home to taken a lot of your time, so I'm glad you had time.
Brandon Moulton (28:36):
Oh yeah.
Fernando Angelucci (28:36):
To make time here. So I appreciate everybody tuning in for this week's episode of What's The Deal, where we covered Hard Money Lending and got you the answers you need. Thank you very much, and I'll see you next week.
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