Using Hard Money To Fund Your Real Estate Deals

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“No Money Down” real estate deals sound enticing and the late night gurus fabricate it seem as if anyone can bag cash back at the closing table on all their deals. Yes, you can do a exact estate deal and get cash aid at the closing table. Yes, you can buy a property with no money, no job and no credit. But for those of us in the real estate investing business, we know that everything comes with strings attached. The trick is to know what strings you can pull on and what strings will hang you. 

Many no money down deals sound great when you hear them on the infomercial, but when you get into the actual mechanics of structuring the deal, you may find yourself dangerously discontinuance to committing loan fraud. Since federal prison is probably not your idea of a serene vacation spot, educating yourself is the best insurance to withhold yourself away from the scams. Until you have gained enough experience to know when to walk away, remember this basic rule: If a deal sounds too good to be true, it probably is. 

One legal way to get into a property and get cash help at the closing table is to use hard money. Hard money is a term used to describe money that is loaned at a relatively high interest rate. Hard money has been termed the “loan of last resort” but that is not the case for valid estate investors. Typically, the person who is using hard money cannot use traditional methods of financing such as going to a bank or mortgage company either because their income is not verifiable, their credit may have “dings” or because of the condition or type of property. 

Banks do not make hard money loans. Banks look at a person’s ability to repay (credit history, income) and base the loan on that. Hard money is the opposite. A hard money lender looks at the value of the asset and lends based on the loan to value (LTV) ratio. Because these loans are based on the value of the asset rather than the borrower’s credit, the loan to after repaired value ratio is usually 65% – 70% as opposed to a bank’s LTV of 80% to 90%. For example, if a house has an after repaired value of $100,000, a hard money lender will loan a maximum of $65,000 on the property. Real estate investors use hard money to finance rehab properties (that banks won’t lend on ) and to close deals quickly when fast action is required. 

The interest rate on hard money loans runs between 12% – 18% and most lenders charge between 2 – 5 points (a point is 1% of the loan amount) as their fee. For example, on a hard money loan of $100,000 with five points, the amount paid for the points would be $5,000. Most hard money loans are for short periods of time, six to twelve months and are paid back monthly as an interest-only payment. In our example, the payment on $100,000 loan would be $1250.00 a month. 

Hard money lenders, or private lenders, are not “leg-breakers” or shadowy characters. Unless they are lending only their own money, they are mortgage brokers or loan officers who are licensed by the state. The actual people who invest in hard money lending can be individuals, a dependable estate investment trust, a third party’s self-directed Roth IRA or any other private entity – a corporation or LLC. The fees and interest rates are legal and less than what a lot of credit card companies charge. 

At those rates, who would use hard money? Many real estate investors use hard money loans for their deals. There are all sorts of reasons for using hard money as opposed to going through a bank or mortgage company. Many times an investor finds a deal that must be closed on fast. Banks and mortgage companies take a minimum of three weeks and usually closer to five weeks to close a loan. They unprejudiced can’t travel fast enough. 

Sometimes a property needs extensive rehab work and banks don’t want to loan on a property that is not in re-sellable condition if the borrower defaults. Hard money lenders know the property is being bought to be rehabbed and they look at the after repaired value of the property, not the value of it as it sits. A bonus to that is if the property is bought at a deep enough discount, many times the hard money lender will include rehab funds in the loan amount. The investor doesn’t have to dig into his hold pocket or take out an additional loan to rehab the property. 

Paying 15% interest and five points seems pretty steep to those not in the loyal estate investing industry. But, on a six month turnaround, paying the interest and points on a deal can be a lot better than having to take on an equity partner to finance a deal and then having to split the profit with him 50/50. Most investors would rather pay a high interest rate for a short amount of time than give away half of a deal. 

When should you use hard money? Use hard money on deals where you need to close quickly. Hard money lenders can usually close within 5 – 7 days of receiving the information they need on a property. If you need repair money and you have cut a gracious deal on the property, a hard money loan can be the way to go. The best time to exhaust a hard money loan is if you know you will not be holding a property for more than six months or if you have the ability to refinance the loan out of the hard money in a short period of time. 

Hard money loans are not for everybody and they are certainly not for the faint of heart. But they have their place in an investor’s arsenal of tools. Hard money lenders can be found all over the country. The Hard Money Directory is a listing of over 60 hard money lenders across the United States and Canada. It is available for free at www.therealestatebirddog.com.