First of all, what is a hard money loan? According to Wikipedia, “a hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk and shorter duration of the loan.”
Why should you consider using hard money?
One of the biggest advantages of hard money is that it is available. Borrowing from friends and family is great, but they can run out and you never want to miss a deal because you can’t find funding.
Hard money loans are typically used for short term funding.
Because hard money is most often used for rehab and resale, these deals are something you get into and out of quickly – usually 6 to 12 months. If you pay 14 percent to borrow for a year but pay it back in only 6 months, you’ve only spent 7 percent to borrow those funds. Not much if you’re doing it right and making the end profit that you should.
What about the points?
Most hard money lenders charge 3-5 points (each point is 1 percent of the loan amount). Is that a lot? Well, you need to weigh the cost against your potential profit but, generally speaking, the cost is well worth the reward which is why there are so many hard money lenders out there. This type of lending is good for you and good for them.
Is hard money worth the cost?
Many borrowers will tell you that these loans are expensive. I often ask those same people what the costs are and they’re usually not sure. Is hard money too expensive? That depends on your perspective.
Here’s an example: Say you purchase a house with an after-repaired-value (ARV) of $100,000. You’ve purchased it for $50,000 and need to put $15,000 into renovations so you can sell it. And say you found a hard money lender who will lend 65 percent of the ARV which is exactly the amount you need here. If the lender charges 3 points, you would pay $1950 in points to borrow this money (3 points or 3 percent or .03 x $65,000 = $1950). Hard money lenders are also going to charge interest while you have the money but that interest is usually a very small amount since you use this money for only a very short time – say six to nine months.
In this example, the cost of the points is $1950 which many people complain is high. But, is it? Would you walk away from this deal rather than pay those 3 points? If the numbers work as shown in the example, you stand to profit $20,000 or even more on this deal. Would you spend $1950 to make $20,000? I would – all day long. Don’t get stuck on the cost, but focus on the potential results.
Why is hard money “expensive”?
Because the lender is taking on huge risk on a distressed property. Unlike traditional lenders who loan on a home that is in retail condition, hard money lenders are counting on you to purchase, renovate, sell and pay them back all in a very short time frame, often with little or none of your own money in the deal. And, unlike friends and family, these investors rarely know the borrower or the property they’re lending for. Their risk is high so their fees include points as well as interest. Points help cover their costs and their risks.
Hard money is fast.
Many hard money lenders can qualify you and get you funded in as little as two weeks. When you stumble upon a great deal and time is of the essence, traditional lenders just can’t move that quickly.
In my experience, friends, family members, and private money lenders run out of funds. If they’re out when you need the cash, hard money is there so you don’t miss an opportunity to create profit.
It’s good to know what hard money is, how to use it, and where to find it so you never miss a deal for lack of funds.
If you live in North Carolina, I represent Residential Capital Partners and I’d be happy to work with you and walk you through the process to fund your rehab deals. We fund up to 65 percent of your after repaired value. If you plan to sell at a profit, you don’t want more than 65 percent in the deal when you’re finished, meaning we can loan everything you need for both the purchase and the renovation.
Need funds? Let me know. What’s been your experience with hard money?