Can I get 100% financing for my fix and flip from a hard money lender?

Estimated reading time: 7 minutes.

Post outline

What is 100% financing?
100% financing options
Why 100% financing is often not realistic
Realistic expectations for LTC
How to increase LTC
Conclusion

What is 100% financing?

100% financing is frequently sought after by investors who are looking to maximally leverage their own capital or have none of their own capital to begin real estate investing.

Generally speaking, 100% financing means that 100% of the total project costs will be financed by a lender or lenders. However, in most cases it does not mean that you come out of your pocket with $0. The distinction between the two is a bit tricky, and worth some further explanation.

To provide an example of how 100% financing works with most lenders, we can take a look at how most fix and flip lenders fund the rehab portion of a fix and flip.

Most fix and flip lenders will advertise that they fund “100% of the rehab”. This is technically a correct statement, however it typically means that you have to float the first portion of the rehab budget.

To help understand this further, let’s take a look at some of the options that you can use in order to achieve 100% financing, as well as what it looks like in practice.

100% financing options

Generally speaking, there are three ways that you can obtain 100% financing;

Receive funding from multiple capital sources
Work with a lender who provides 100% financing under a standard structure
Enter into an option structure with a lender that provides 100% financing

Let’s go over each and see how they play out.

1) Receive funding from multiple capital sources

This is generally one of the first solutions that real estate investors devise once they begin speaking with fix and flip lenders. As most fix and flip lenders do not offer 100% financing, real estate investors begin to think of other sources of funding.

Let’s say that a fix and flip lender you speak with is willing to fund 80% of the total project costs. This means that you still need to finance the remaining 20% of the project in order to achieve 100% financing.

Here are the two primary options you would have if you are seeking funding from multiple capital sources,

Work with an additional lender
Get money from a family member or friends to cover the remaining project costs

Working with an additional lender can take the form of working with another hard money lender, or a private lender. Unfortunately, you often run into problems while attempting this.

Many fix and flip lenders stipulate in their loan documents that they need to be the “1st and only lien” on the investment property. In effect, this means that you can’t have a separate lender collateralize the property.

Getting money from a family member or friends to cover the remaining project costs is an option, but you need to be careful about how you receive those funds to be sure it’s not in violation of the lender’s guidelines.

2) Work with a lender who provides 100% financing under a standard structure

This option, though appealing on its face, still generally requires you to outlay some capital.

Going off of our rehab financing example above, a hard money lender can still provide “100% financing” and require you to float some portion of the project costs required.

In addition, nearly all lenders that offer 100% financing have an LTV limit that can sometimes prohibit you from achieving 100% financing

Let’s say that you have the following fix and flip scenario:

Purchase price: $150k

Rehab amount: $50k

After-repair value: $275k

Let’s take a look at the lender’s metrics:

LTC = 100% or $200k

LTV = 72.7% or $200k/$275k

In this scenario, assuming the hard money lender has an LTV cap at or above 72.7%, then you would qualify for 100% financing. However, many hard money lenders have an LTV cap at less than or equal to 70. If this was the case, then you would not qualify for 100% financing.

Let’s use the below example to illustrate what would happen if you do qualify for 100% financing.

Lender’s LTV cap = 70%

Purchase price: $150k

Rehab amount: $50k

After-repair value: $300k

Let’s take a look at the lender’s metrics:

LTC = 100% or $200k

LTV = 66.6% or $200k/$300k.

According to the above simplified example, you would qualify for 100% financing. However, let’s take a look at how that $200k loan amount is broken down.

Amount funded for acquisition: $150k

Amount held back for rehab: $50k

In this case, the lender would fund $150k, or 100% of the acquisition price. However, they are still holding back a portion of the total loan amount for the rehab portion of the project. You will, in all likelihood, need to float this portion of the project, and therefore need to outlay some of the $50k that is held back for rehab.

As you can see, even if you work with a lender that has a 100% LTC, or 100% financing option, there are still obstacles and likely still some capital outlay on your part.

3) Enter into an option structure with a lender that provides 100% financing

This is a more unique structure, and one that is not offered very frequently to real estate investors.

Some lenders have a product whereby they set up an entity which takes control of the property, and you make option payments (as opposed to interest payments) to the entity.

Lenders can feel more comfortable with this structure, because there is no foreclosure process; the lender already owns the property!

Again, this product is rare, but in practice, assuming all goes well, it functions somewhat similarly to the 2nd option of a lender who would fund 100% under a more typical structure.

Why 100% financing is often not realistic

There is often some disparity between what real estate investors think of as 100% financing and what lenders consider 100% financing, and that is largely due to the difference in timing.

To most real estate investors, 100% financing means that they get 100% of the project costs now. To most lenders, 100% financing means that you will get 100% of the project cost covered, but you will need to outlay some capital for the renovation work and be reimbursed for that work first.

Additionally, as you can see from the above examples, 100% financing is a possibility, but it is often fraught with obstacles that make it difficult to obtain.

Realistic expectations for LTC

100% financing generally equates to 100% LTC, or 100% loan-to-cost.

Even though 100% LTC is obtainable on a fix and flip project, as was outlined in the above scenarios, most fix and flip lenders will offer somewhere between 75-90% LTC for most prospective borrowers.

In turn, this means that you can expect to come to the closing table with somewhere between 10% and 25% of the total project costs.

How to increase LTC

Hard money lenders will typically vary slightly in their specific LTC criteria, but broadly speaking hard money lenders decide what LTC they are willing to offer based on the following variables;

Experience: More experience generally means a higher LTC.
Cost of capital: How much you pay is often positively correlated with LTC; the more you pay, the higher your LTC.
Personal financial strength: The stronger your personal financial profile is, the more leverage lenders are generally willing to offer.
Existing client: If you have worked with a lender before and demonstrated success, you typically have more bargaining power than a new client.

The above list is not necessarily exhaustive, but it covers a broad swath of the criteria that hard money lenders will use in determining LTC.

Conclusion

100% financing is a highly sought-after loan structure, particularly by investors who are looking to minimize their initial capital outlay.

100% financing for fix and flips tends to be quite rare, and even when it is achievable, you still may need to float a portion of your construction budget.

Most fix and flip lenders will offer somewhere between 75-90% LTC for most deals with most borrowers, and the exact LTC offered will often depend on a combination of variables such as; experience, cost of capital, personal financial strength, and your relationship with the lender.

Do you need financing for a current or upcoming fix and flip project?

If so, fill out our preliminary application at this link to get started.