What is Hard Money?
Simple: short term loan, secured by your property.
Here’s what I think about hard money:
First of all, I’m not sure why it’s called “hard money”. It’s actually very easy to get. In fact, the only thing “hard” about this type of funding is the name. Hard money is usually issued by private investors or companies who have access to large sums of capital meaning, once you’ve been approved, that source doesn’t run out of funds.
True hard money can cost more than other forms of lending like private money or your own cash. Obviously your own cash costs nothing to use – or does it? But your own money won’t last very long. And you can borrow private money from a variety of sources – friends, family, co-workers, other investors – as long as that’s available. I describe these and other borrowing strategies in the post: 6 Strategies for Funding Investment Properties.
So why does hard money sometimes cost more? Because these companies are taking a huge risk on someone they don’t know, rehabbing a property anywhere in the U.S., promising to do a complete and competent rehab. And, these companies do a lot to secure funds from sources like hedge funds and wall street meaning they have a lot of management and administration costs as well as their cost to borrow these funds on your behalf.
What are some advantages of using hard money?
- Hard money lenders are perfect for fix-and-flip properties as loans are short, typically 3-9 months. Perfect if you’re planning to wholesale or renovate and resell quickly.
- Hard money lenders understand ARV (after repaired value) and will consider your planned repairs when lending. Banks, for example, only look at current property value when lending. Banks loan on the property as-is. Hard money lenders loan on what you’re going to make it.
- Hard money lenders will loan for the cost of the rehab as well as the purchase price. Banks require the property to meet underwriting requirements and you may need to spend a great deal to bring the property up to the condition necessary to meet those requirements before you can get a loan.
- Hard money loans are faster than a traditional lender, usually only two weeks, because their requirements are fewer.
- Typically all a hard money lender looks for from you is:
- credit score
- cash reserves
- sometimes your employment status
- Hard money charges points plus interest. Why both? Because the loan is for such a short time, lenders would not make enough to make lending worthwhile by charging interest only. Points are basically interest up front. Because the loan is for such a short time, interest is not much of a concern to the borrower, but points are something you need to pay attention to, especially how often they are recharged.
- Hard money is not good for long term holds. Hard money lenders charge points plus interest based on a certain time frame. If you need an extension, you may be charged those points again which is a cost you need to prepare for in your projected expenses.
Why would you choose to use hard money?
- To keep your personal funds for running your business
- Hard money covers your cost of both purchase and rehab so, you potentially have no money out of pocket to do a deal!
- Increases your return-on-investment when you have none of your own invested!
- Minimizes your out of pocket expense allowing you to continue running the rest of your operation (or life…)
- Hard money is faster & requires fewer personal and property qualifications than conventional loans
- Once approved with a hard money lender, it never runs out so you always have funds.
- Hard money allows you to compete for more deals – because it’s
- Always there when you need it!
By the way, I rep a hard money lender out of Dallas, Residential Capital Partners. We have used hard money in our business for years – we’re a fan. When asked to partner up with ResCap, we did! If you decide hard money is right for you, please contact me to see how ResCap can help, or fill out our online app to get started at ResidentialCapitalPartners.com.
Have you used hard money? What’s been your experience?
And, as always, please leave your questions and comments below.