You may have heard that Hard Money Lenders are the easiest funding you will ever receive for your fix and flip. That is true to a certain extent. That’s why Real Estate Invester’s use Hard Money. However, one of the “myths” of Hard Money Lenders is that they will give you all the money—100% of the acquisition price—and 100% of the renovation funds needed. In reality, very few hard money lenders offer this. 100% funding is more likely with an individual like a private lender.
Most Hard Money Lenders, although a private source of funds, are acting as a bank for your real estate flip deal. They will need you to have some “skin-in-the-game” (your own cash, or your partners cash). How much cash will depend on many things: LTV, location, your experience & credit, $ amount needed, etc. But, you say, if I’m paying so much for the money, why do I need to provide all this info? Think of it this way: Would you lend a Real Estate Investor a few hundred thousand $$’s without “skin-in-the-game”? You probably would not.
However, with that said, you may be able to cultivate a relationship with a private HML that will ask minimal questions. Their first question may be “where do you want me to wire the funds?” What real estate investor wouldn’t like that!? That will usually happen once you have completed a few deals that the Hard Money Lender funded and got paid back on in a timely manner. That is one reason why once you find a reliable & responsive Hard Money Lender as your go to source stick with them!
Pros and Cons of Using Hard Money Lenders:
Pros/Advantages: – Make funds available quickly – Require minimal documentation – May loan more funds than conventional sources – Will investigate your deal and share feedback – Will fund troubled deals – Will fund unconventional properties | Cons/Disadvantages: – Expensive – VERY expensive when compared to conventional funding sources – Short-term only – Loan may not always be extendable, and extensions can be expensive – Funds may dry up from a particular source |
Pros/Advantages :
Borrowing hard money to fund your real estate investment deals, otherwise known as using other people’s money to do more deals and grow your wealth, has many advantages for all Real Estate Investors. For one thing, funding is much faster than it would be with a conventional loan. In addition, a hard money loan is loaned against the value of the property used as collateral rather than you or your ability to repay the loan, which conventional loans are based upon. This means the paperwork required (and the qualifications) to secure the loan are vastly reduced. However, the hard money lender wants you to commit to contributing something to the effort. Hard Money is not 100 percent financing (usually). So, your financial status may be examined.
After you’ve done a few successful deals with a HM lender, you’ll see how that can be a real time and effort saver and they’ll have funding readily available for you! The first deal is always the toughest. After that, you’ll know what your HML wants to see for your deals. Imagine having funds readily available, fast, just from a phone call. That’s the advantage HML’s give you once you have cultivated a relationship with them.
Working with a HM lender should be a team sport. (Remember, you learned to create a “team” in your REI training classes.) In much the same way the bank had your home appraised before you could get the mortgage; many HM lenders will investigate your proposed deals before they give you their commitment to fund them. Most will want to do a new appraisal. Others will be happy with just the Broker’s Price Opinion “BPO”. Find out what your HML wants so that you’re ready.
They may also offer opinions and suggestions. These evaluations can be valuable to you as you continue to create REI deals because they tell you what to look for or avoid in the future. The last thing you want is to get involved in a bad deal.
Hard Money Lenders will also be more open to funding your deal if it doesn’t conform to bank standards. Troubled property? Environmental concerns? Partnership dispute or buy out? When you fund the deal using Hard Money, these considerations are not a problem for an experienced HML. They don’t have a problem loaning on unconventional properties, either. They may be the only source of funds for abandoned real estate or even a “crack house” or drug den.
Here is another “Pro” about Hard Money Lenders; hard money loans are less expensive than the cost of a joint venture (JV) or equity partner. JV or equity partners may want a preferred return of 8% to 10% and then want an additional 50% to even 90% of the profits from a deal if they provide you the funds. Since you can get a HML fast enough to jump on that sweet deal you just found, is it worthwhile? It is if the upside (profit potential) is significant enough for you to want to purchase the property despite the cost of hard money. There must be an upside.
Cons/Disadvantages:
Now, of course, there must be a downside, right? So, let us examine where that may be. No lender will loan out money for no return, except perhaps family, but that has another kind of price altogether, doesn’t it? So, what is the downside? Well, primarily, HM is expensive. Very expensive! Compared to what; Compared to the cost of a conventional (Bank) loan. Then go to your bank and get the loan for your next flip. On the other hand, compared to not getting funding at all for your real estate deal and ultimately making NO money on the deal, you can see HM has its place.
HM loans are short-term provisions for short-term needs. You don’t want to borrow HM for years. Why borrow the expensive cash for a long time, when the driving motive in your RE deals is quick cash to buy right and then reposition the property for sale or lease?
HM loan terms may not always be extendable. You and your HM lender will work together to determine when and if to include extendibility into your loan contracts. It can be very expensive to extend, as it may be costly to pre-pay (pay the loan off before the certain period of time that the HML requires) as well. Once you get the method down, you should be able to estimate your timing accurately and borrow only what you need when you need it.
Each HM lender has his or her sources of money to loan. While it is important to develop a good relationship with your HM lender, it is equally important to diversify. Lenders can lend only what they have available at any given time and may not always have funds readily available. You certainly wouldn’t want to be in the position of having to search out a completely new source of funding in the heat of a hot deal. You may put yourself in that position if you don’t have options already in place as you shop for deals and lenders.
So, shop around and have a few HMLs lined up for your first or next flip.
By Kevin Clark, 44 Oak Capital