Real Estate Investment Financing Strategies : Hard Money is Easy Money
If you have been in the real estate investing arena for very long, you have probably heard the term “hard money” used a few times. To clarify this subject, let me explain exactly what “hard money” is, why investors use it, and my experience with hard money lenders in our business.
What Hard Money Really Is
First off, there are three things that signify a hard money loan:
- Based on the Property – the loan is made based on the deal, not your credit and is usually around 65 to 70% of the after repaired value (ARV).
- Short Term – usually anywhere from 3 to 12 months.
- High Interest – 12% to more than 20% depending on who you use.
Why Investors Use Hard Money
Why would anybody want a loan that they have to cash out quickly that seems like it costs an arm and a leg?
I’ll tell you why! Maybe you have a deal under contract that you NEED to close a week from today. Try going to Bank of America on that one. Maybe your credit sucks. Maybe you are buying a house that is in such bad condition, traditional banks won’t finance it. Maybe you plan on buying a house, renovating it, and selling it within a matter of months. Maybe you already have a number of houses on your credit report and the banks won’t lend you any more money. These are all good reasons to bring in a hard money loan to finance a deal among others.
When you break it down, I don’t think that hard money is that expensive. It’s a cost of doing the deal. If you have ever bought a house conventionally, you have seen all the closing costs associated with buying the property. By the time everybody gets paid that had a hand in the financing process, you’ve shelled out at least a few grand. And how much is it going to cost you if you don’t get a good deal financed at all?
My Experience with Hard Money Lenders in our Business
After buying our first investment property, it was only a matter of 2 or 3 months before we found a hard money lender. There are people that claim to be hard money lenders but when it comes down to it, they want you to jump through every hoop and hurdle banks do. I do not consider these people hard money lenders at all. This guy that we found would fund deals at 70%, for six months, and charged 15% plus a couple points. To consider lending on a deal, he required an appraisal, a CL-100, and a heating and air letter. If it all checked out, the deal was funded.
In the last few years, I have built relationships with a couple other hard money lenders. I found one through networking and the other through a classified ad in the newspaper.
There are hard money lenders in every community looking for good deals to fund. They know that worst case scenario equals getting a property back and making all the profit the investor should have made. Even if you don’t plan on using one, get out there and find a hard money lender to add to your team. It could mean the difference between getting a deal done and watching another investor cash in big!
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