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Posted over 9 years ago

Using Hard Money. It's Actually Not That Scary

Often times, when I talk to a novice investor or even a somewhat experienced investor, I hear, "I want to do a flip or buy a rental but I don't have enough cash and the bank won't finance me...".

The easy solution to this common problem is 'Hard Money'. The following response I often get is either 'what is that' or 'I heard they charge insane rates and are too expensive'. The truth is, Hard Money is not as bad as many think.

I've closed at least 50% of my deals using Hard Money and every one of my buyers who've used it is satisfied with the strategy.

Well, what is Hard Money?

Hard Money is also called private money. The funds don't come from a bank, rather they come from private individuals who lend their money. They don't have as stringent regulations as banks do so it's easier to get the loan. The drawback? They charge a higher interest rate than banks do. That's true. The lenders here in Orlando are charging 12% interest. That's high, but not anything like the 18% interest homeowners were paying back in the 1980s for their own home!

So how can someone use hard money to help leverage their money?

Let's analyze the benefits of using Hard Money using a recent deal of mine as an example:

The home was a 4 bedroom, 2 bath home for $155k. The After Repair Value (ARV) was $270k, but it needed $45k in repairs. Now, if you used all cash, you would need $200,000...CASH!!! Not an easy feat.

Now let's take a look at the deal using hard money:

The hard money lender has the following terms: 3.5% loan origination fee, 12% annual interest, 20% of purchase and rehab cost for down payment and loan up to 65% of the ARV. So let's break it down with a purchase price of $155k and rehab cost of $45k. The origination fee is $5,600 and the down payment was $40k. So to purchase this home you would need $45,600.

What about holding cost for the loan and closing fees?

This lender only charged $900 in total additional closing fees and holding it for 6 months would be $9,600. So to purchase this home and rehab it with Hard Money, you would only need a total of $56,100. Now, that's a big difference between sleeping soundly at night and closing a deal by the skin of your teeth, if at all.

Even better than only having to use $56k to purchase and fix the home, is the fact that once it's SOLD, my investor is looking at a NET profit between $35,000-$40,000. That's almost a 75% return on his $56k in 6 months or less! That's compared to buying the property all cash which would have resulted in only a 20% return. Talk about leveraging your money!



Comments (11)

  1. I didn't quite understand the whole concept of it as I am still new to RE investing. Did you use his money to put a down payment on the total price of the home to flip it or what? 


    1. Rafael, it works like a normal bank loan. The lender gave the buyer 80% of the purchase and rehab price and the buyer paid the rest of the money.

    2. Rafael, it works like a normal bank loan. The lender gave the buyer 80% of the purchase and rehab price and the buyer paid the rest of the money.

  2. Enjoyed the article, thanks for sharing!


    1. No problem Dmitriy. Thanks for reading it. I hope it helped.


  3. Great article!

    What about using hard money lenders for a rental property?  Would that be standard for a real estate investor to do and take advantage of?  There is the mortgage payment that one has to consider then the actual hard money loan re-payment I guess.  But for these four, five or six plus unit properties it may be worth it.. what do you think?


    1. I work with 2 lenders that loan on rental properties. One has a 6% interest rate and the other can do 9% with 30% down. I have buyers buying $70k homes with $15,000 - $20,000 down. Most banks will charge higher interest rates for investment homes so why not use a lender that can close in 7-10 days?


  4. Great points Christian, even if someone had the cash to spare, smart leverage always makes sense!


  5. Nice article.  There are investors who will walk away from a deal like that because they won't pay those high interest rates.  They are walking away from a $35K profit on a project they could handle easily.  Very strange.


  6. Yes in the Central Florida area we have 3 great lenders we constantly work with. For lending outside of the area each lender has different rules and rates that I am unfamiliar with.


  7. Can you recommend a good hard money lender that can act quickly?

    Thanks

    Jim