Why Hard Money is Easy Money for Creative Real Estate Investors
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, I will explain the 3 components of a hard money loan, why investors use it, and my direct experience with it.
3 Components of a Hard Money Loan
1. Based on the Property – The loan is made based on the deal that you bring to the table for financing…NOT your credit score. Loans are usually around 65 to 70% of the after repaired value (ARV).
2. Short Term – Loans range from 3 to 12 months.
3. High Interest – Expect to pay 12% to more than 20% depending on who you use plus points.
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?
My Experience with Hard Money Lenders
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. The hard money lender we first met would fund deals at 70% of ARV, 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 someone else make all the money! The choice is yours.
Patrick Riddle has done over 100 deals since he started investing just over 5 years ago. He is considered an expert in creative real estate investing techniques, lease options, short sales, and recruiting private money. He has risen over $5,000,000 in cash from private investors for his company.
Being a teacher at heart, he enjoys writing for his blog, Must Know Investing : The “Best Darn” Creative Real Estate Investing Blog on the Planet
What's a CL-100?? I'm unfamiliar with that term.
A CL 100 is a wood infestation report. It's used to report the presence or absence of any wood destroying organisms and any damage as a result of them.
This may only be used in some parts of the country. In South Carolina, termites are a real threat so it's required to get a CL 100 for all traditional financing purposes and is a good idea even if you are paying cash.
For additional info, check out my blog MustKnowInvesting.