A quick guide to hard money
A lot of people who don’t use or don’t understand hard money loans will take a negative view. Some people see hard money as ‘risky’. But in my opinion, hard money is a great tool to leverage your real estate investing goals. But you should know what you are getting into prior to simply applying for a loan. As your hard money lender likely won’t explain all the ins and outs beyond the rates they’d like to charge you.
Disclaimer - I am not an attorney or a financial advisor - so you must do your own due diligence. Expressed herein are some of my personal opinions based on my individual experience with hard money.
WHAT IS HARD MONEY?
Hard money is a short term loan secured by real estate. The loan is funded by private investors rather than a bank or a credit union.
Typically, a hard money loan is for 12-months and it requires interest-only payments until the loan term ends and a balloon of the full principal amount is due.
The amount of money a hard money lender will lend is based on the value of the property, rather than the borrower’s credit score.
WHO USES HARD MONEY?
Investors often use hard money to finance a real estate transaction where the property is in need a rehabilitation. Hard money is a bridge loan. It provides the investor time to renovate the property and bring it up to a lendable standard, as most major banks will not lend on a property in severe disrepair.
Hard money can be used to finance the purchase of a single family home, multi-family home, commercial property, land or industrial.
Hard money is also used because lenders can fund the loan fast, in as little as a week. Whereas a typical bank will take 30-45 days to fund a loan.
It’s also easier to apply for a hard money loan. It requires less documentation for an approval.
WHAT IS IT USED FOR?
House flipping, property development and personal loans.
As I stated prior, when flipping a house you will have a hard time finding a traditional bank willing to lend on a home with no running water, no heat or no kitchen appliances. Maybe the house is structurally unsound or it has a hole in the roof.
“Some people look for a beautiful place. Others make a place beautiful.” - Hazrat Inayat Khan, spiritualist
Sure, you could apply for a 203k renovation loan through a traditional bank but you must be an owner-occupant of the property you intend to renovate. And in my opinion, this type of loan could hurt your offer when trying to purchase a property.
Similarly, hard money can be used to purchase and develop a property. You can build a brand new home and resell it for much more before the loan comes due.
I always have a back up plan in place in case something unforeseeable happens and I will not be able to resell a house within a 12-month period.
Typically, my back up plan involves getting a traditional bank mortgage on the property as the house should be fully renovated and livable in this time.
Personal loans are another potential use for hard money, however I do not recommend it.
Sometimes, people in foreclosure will take out a loan to try and save their house. Taking on more debt when in this position, in my opinion, will sink you.
WHAT DOES IT COST? INTEREST RATES, POINTS & LTV
This will vary based on the lender and your experience as an investor.
Interest rates for hard money typically range from 8-12%. While points can range from 2-4$ of the total amount loaned.
On my very first hard money loan, I was charged 10.99% interest and paid 2 points.
To determine your monthly payment, simply multiply the interest rate by the total principal loan amount and divide by 12 months.
You calculate points by multiplying the percentage points, let’s say 2%, by the total principal loan amount.
LTV or loan-to-value is a ratio of the total loan amount a lender is willing to lend to the value of the home. Hard money lenders will let you borrow anywhere from 65% to 100% of the purchase price and renovation costs.
HOW TO FIND A HARD MONEY LENDER
Hard money lenders will be interested in your business, so there are many ways to locate them. You can simply google “hard money lender” or you can also ask around at your local real estate investor association meet up. There will almost always be a hard money lender in the room passing out his or her business card. You can also simply ask another investor who they use or go on Bigger Pockets and search or pose the question.