Hard money financing can be a game changer for your real estate business. Before I learned about hard money financing I was using all of my own cash to buy investment properties and it did not take long before I was tapped out.
Once I found a hard money lender to finance my purchases, my business skyrocketed. I was able to do 5 times the volume of business using a fraction of my own cash. Hard money financing has been a boon to my business. Now I’m pleased to offer other investors hard money financing for their investment purchases.
I have put together this short guide to help you learn about hard money financing. The way I lend hard money is different from other hard money lenders. But all hard money lenders are similar to the extent they focus on the asset first and the borrower second.
What is Hard Money Financing?
Hard money financing is asset based financing. Traditional financing begins by evaluating the borrower first, then the asset second. Hard money flips that equation.
Hard money financing is used to purchase investment properties. The rates are higher and the terms are shorter (usually 6 to 12 months).
Hard money lenders like myself are most interested in funding an asset that is below retail value. The property must be purchased at a discount or have value-add potential.
Because hard money financing focuses on the property, the underwriting process is much quicker than traditional financing. Hard money loans can be funded in just a couple days compared to traditional financing which usually takes 45-55 days.
The ease and speed of hard money financing comes with a higher cost. Hard money loans are usually structured with points on the loan amount plus interest accrued during the holding period. You will have points and interest with a traditional loan but hard money is usually a lot more. In my area it is common to see loans that cost 10 points on the loan amount plus 10% interest during the holding period.
Benefits Of Hard Money Financing
Hard Money Financing Is Easier To Get Than Regular Financing.
Traditional financing requires A LOT of paperwork. I recently refinanced a couple rental properties with long term financing. It took about 60 days to complete the refinance. During that time, the lender needed 2 years of bank statements, tax documents, a list of all assets owned, a credit report, and a host of other documents. The lender also needed to complete an appraisal on the property. When it was all said and done, it took a lot of time and paperwork to get everything so the loan could fund.
Hard money financing requires minimal paperwork. Hard money lenders have different requirements. For example, my requirements are minimal because most of the investors I finance I know from being a real estate agent. I know if they can spot a deal, fund a rehab, complete it in a timely manner, and sell for a profit. So my requirements are minimal.
Investors that I’m working with for the first time are screened for their ability to repay. One of the screening mechanisms I use is the investors ability to pay the fee at closing. If they can pay a 10-15% fee at the closing table, it’s enough to make me feel confident they’re not going to walk away from the loan. They want to see it resell so they can get their money back plus make a profit.
Other hard money lenders require some banking information and a list of successful projects the investor has completed. New investors are a higher risk versus more seasoned investors so hard money lenders want to lend to someone with a track record of successful fix and flips.
Faster Than Traditional Financing.
Hard money loans can be funded in a matter of days. I do not like it when an investor only gives me a couple days to underwrite a deal mostly because it means I have to drop everything else I’m doing to evaluate the property, prepare the loan documents, and arrange the funds to be delivered but it can be done. Also, I have found that mistakes can be made when doing a deal that fast.
You should give your hard money lender 10 – 14 days notice for funding your real estate deal. That’s enough time for the lender to underwrite the property, the investor to complete adequate due diligence, and everything to go smoothly.
Traditional financing takes a minimum of 30 days. Depending on the type of loan a buyer is using, it can take longer. Right now, FHA loans are taking about 45 days in my market. That can feel like a really long time if you’re the seller.
Financing Is Available For Distressed / Ugly Properties.
Some of the worst properties that have the most upside potential won’t meet the standard for traditional financing approval. Hard money lenders look past what the property is today and focus on what the property can be tomorrow.
Traditional lenders will not finance properties that need major repairs or vacant commercial properties. That’s unfortunate because those are the properties that an investor can purchase for the biggest discount and make the most amount of profit by renovating and reselling. Hard money lenders understand that and that’s why you can finance very distressed / ugly properties with hard money financing.
Drawbacks Of Using Hard Money Financing
You can call them drawbacks but it’s more accurate to label them as limitations. They are limitations because you will not want to use a hard money loan in every situation. For instance, if you have identified a turn key rental property, you may be better off using traditional financing if your plans are to keep it for the long term. If you want to hold a property for cash flow, you can start with a hard money loan but you will need to refinance into long term financing to make it a meaningful buy and hold.
Hard Money Financing Costs More.
Hard money costs more in points, fees, and interest than traditional financing. Hard Money Lenders need to charge a higher rate to make sense of the ease, speed, and higher risk associated with financing distressed properties.
Hard Money Financing Is Short Term.
Typical financing terms are 6 – 12 months. That means you have six to twelve months to rehab and sell or rehab and refinance the property. Some terms can be longer but you’ll want to negotiate that from the outset. Once the term reaches maturity, you could be in default of your loan agreement and / or be charged with hefty extension fees.
Type Of Properties That Are Best Suited For Hard Money Financing
Wholesale properties are real estate that is picked up at a steep discount. These properties can be assigned to an end-buyer before closing or purchased and immediately resold for a profit via double closing.
Wholesalers typically assign the contract to purchase to another investor before closing. Other times, wholesalers will close on a property they have under contract and list the property on the multiple listing service with a real estate agent. The process of closing and listing the property in as-is condition is known as “Wholetailing” because the investor is wholesaling a property through the “retail” market.
Wholesaling through the multiple listing service requires the investor to close on the property. These properties are a great fit for hard money financing because they don’t need the money for long and there is enough equity in the property to cover all the fees associated with a hard money loan.
Fix And Flip & BRRR Properties
Properties that need to be rehabbed are the most common use of hard money financing. These are properties that require repairs and updates to maximize the after repair value.
Fix and flip investors use hard money because they can make competitive “all cash” offers, take the property as-is, and close quickly. BRRR investors follow the same path except their exit strategy is to refinance rather than sell.
How Much Does Hard Money Financing Cost
There’s a lot of different hard money lenders out there and each one has a unique fee structure. Some hard money lenders will cover the purchase cost plus the renovation costs. I do not structure my hard money loans this way. I will cover 100% of the purchase price and closing costs but the borrower will need to cover the rehab costs.
If you go with a lender that covers the purchase and the rehab budget, you can still expect to shell out about 25% of the project costs. So if you’re purchasing a $150,000 house and have a budget of $50,000. The lender will cover $150,000 of your $200,000 budget. That means you still need $50,000 out of pocket.
Further, you can expect to make monthly payments on your loan during the holding period. The way I structure the monthly payments are interest only. Some lenders will defer all payments until the property is sold. It just depends on your lender.
Every lender is different and each loan is analyzed on a case by case basis. The terms of your loan can change depending on the strength of your deal, your experience flipping houses, and relationship with your lender.
How To Flip A House Using 100% Other People’s Money
There are ways to flip houses using 100% OPM. I’m referring to the process of closing the purchase and reselling, not assigning a contract. Assigning a contract is a great way to flip real estate with little to no risk. The only thing is you need to have a large buyer network or marketing campaign to successfully assign a contract.
You can flip real estate using 100% leverage if you have an incredible deal. Most of the purchases I make nowadays are 100% leveraged. I’m able to do this because I have a track record of sourcing great deals, I have a strong relationship with my money partners, and I am able to resell for a profit to make everyone money.
If you want to complete a deal where you use 100% OPM start by finding an incredible deal. An incredible deal can be defined as one that is purchased at a steep discount. It’s money in the bank. An incredible deal is one where you could walk away from the property and your lender would be happy to take over. For example, if you can buy a $150,000 house for $50,000, that’s an incredible deal — it’s money in the bank. Because you can resell that house for $100,000 with ease.
Finding a great deal is a lot easier said than done. For one, you need to know your market well enough to identify a great deal. Second, you need to spend a lot of time making offers before one gets accepted. I’ve found that people can get lucky and have a great deal fall in their lap. From there, it’s all about knowing what to do with it.
Thanks for reading, please share the article and click the thumbs up. Put your questions below or send me an email at Nico@Cordova1031.com – I’ll answer as many as I can get to. If you enjoyed the article please consider subscribing for email alerts to be the first to know when a new article is created.