Today I want to get your opinion on something… hard money lending. The issue for us is not whether or not we can find deals (although actually getting offers placed and accepted in time has been a whole separate challenge), instead what I am constantly worrying about is how we are going to continue to fund these projects as we work to scale as quickly as possible. This constant “fear’ has led me to consider hard money. Let me tell you what I have found so far…
So, as we do, let’s talk Real Estate, let’s talk HARD MONEY…
QUICK – WHAT IS HARD MONEY?
A hard money loan is a short-term loan typically used by real estate investors to fix up a property. These loans are given out based on the asset the HML is lending on, rather than the individual they are lending to. Hard money loans are typically interest only, and depending on the lender, you can finance up to 100% of the project.
SOUNDS AWESOME – WHY DON’T WE ALL USE HARD MONEY?
Hard money loans can be super expensive…think 9-15% in interest and fees.
WHEN DOES IT MAKE SENSE TO USE HARD MONEY?
- Short term investments
- When the buyer needs to act asap on a property
- House flipping
- Home improvements
PROS TO USING HARD MONEY
- Easily Accessible : There are less requirements needed to qualify for a hard money loan – typically no income or experience required.
- Quick Turnaround : Pre-approval in 1-2 days and can be fully funded in 7-14 days vs normal loans which may take 30+ days.
- Flexible Payment Plan : Typically the lender will only require monthly interest payments until loan expiration, however depending on the lender, this can be negotiated. When you work with a larger financial institution these terms are not really up for negotiation.
- No Pre-Payment Penalties
CONS TO USING HARD MONEY
OKAY, SHOW ME AN EXAMPLE OF HOW THIS WORKS..
Let me walk you through a deal I “lost” just last week because I took too long grappling over the stigma surrounding hard money…
Purchase Price: $145,000
ARV (After Repair Value): $275,000 – this was based on a comp next door, that was just rehabbed and sold its first day on the market. Oh, and by the way, it had 1 less bathroom than the property I was looking at…
Lending Terms: The hard money lender agreed to lend 80% of the purchase price + 100% of the rehab costs for a 12 month period at a 10% interest rate +2.5% upfront points.
So, what did this mean for me?
The lender would loan me the following…
- 80% of purchase price : $116,000
- 100% of rehab costs: $70,000
…Totaling $186,000 loan…
I needed to contribute the following…
- 20% down payment : $29,000
- 2.5% upfront fee:$4,650
…Totaling $33,650 up front contribution…
My costs with financing would have looked as such…
$145,000 purchase price
+ 70,000 repairs
+ 23,250 in loan interest & fees
= $238,250 all in costs… now right off the bat I can see that the all in costs are less than the ARV but lets break down the details some more
The returns were projected to lay out as such…
$275,000 ARV (aka the selling price of the newly rehabbed home)
– $186,000 loan for 80% of the purchase price & 100% of the rehab costs
– $18,600 which was 10% interest on a $186,000 loan
– $4,650 aka 2.5% of total loan amount in up front fees
– $29,000 which was my 20% down payment on the property
= $36,750 in profit…
Now, lets say I just happened to have $215,000 in cash to work on this project and did not have to finance this deal. The returns would have looked like the following…
$145,000 for the purchase of the property
+ $70,000 in repairs
= $215,000 total costs
Remember, the ARV on the project was $275,000…
-$215,000 total costs
So, compared to the potential of a $60,000 profit, I guess $36,750 does not look as nice – BUT HERE IS THE THING GUYS – YOU STILL MADE A PROFIT- YOU JUST MADE ~$37,000 ON THIS ONE PROJECT. So many people are turned off by hard money because they don’t want to pay the high fees associated with it, however I could have made ~$37,000 profit AFTER paying MYSELF and my LENDER back. I kind of think that’s worth it?
OF COURSE there are cheaper ways to fund this project – maybe you have a lot of CASH MONEY laying around? Or, perhaps you have super rich friends and family? Do what works for YOU! After much research I think hard money may just be the next route for me! Will keep you all posted on my hard money endeavors! In the mean time…
What do YOU all think of using hard money lenders? Do YOU have any experience with hard money loans?!
Feel free to comment on the blog post HERE and let us know what YOU think!
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p.s. I have done a TON of research on hard money lenders recently and have actually talked with quite a few. Here are some online lenders I have found helpful. Feel free to reach out to me personally if you have any questions on any of the below! I will keep YOU all posted if I end up working with any of them!
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