Hard money loans are used daily to fund real estate projects and are typically focused on the value and after repaired value (ARV) of the property instead of focusing on the borrower’s ability to pay back the loan. It is a real estate backed loan. You would use hard money in instances where you can’t get traditional financing because your debt load is too high or the property won’t qualify because of the work that needs to be done to make it liveable. Hard money is typically short term, usually the estimated amount of time it’s going to take to complete and resell the project. Depending on the project and the lender you are working with, this may include the cost of the rehab. And, typically a hard money lender will want you to bring money to the table so that you have “skin in the game”.
Hard money loans got their name because they are typically higher risk and the payback percentage and points associated with the loan are higher than traditional loans. You maybe looking at 2-5 or more points depending on the deal and 12-15 percent. Now don’t freak out. It sounds like a lot, but, if it allows you to do a project where you can earn $30k or more after all fees and such are paid, in a short period of time, it’s worth it. Just, remember, the property is the collateral and just like a traditional lender can foreclose, so can your hard money lender. But, trust me, they don’t want to foreclose and they don’t really want the property, they want the money and interest to put into more deals so that their money is consistently cycling through deals and making more money. It is expensive though, so if you can find private money through family, friends and networking connections, go that route first.
Be sure to “dig your well” before you are thirsty. Let friends and family know what you are doing. Let them know that you are working with a team of experts (at Boston AREIA, of course) who guide you through deals. The folks that are interested in “getting in on that” will let you know. Just don’t be shy about what you are doing. And, when you hear success stories about someone flipping a property or flipping a wholesale contract, let them know. You can even invite them to come with you to Boston AREIA so they can meet seasoned investors and can become more comfortable. They can also meet folks like Kevin Collins of Advanta IRA who can explain how they can invest through their IRA.
There will be times that you will need hard money to get your deals done. That’s ok. Your goal is to develop long term relationships with a few lenders. The longer the relationship and the more deals you do, typically the less it will cost you to borrow the money for your deals over time. Hard money lenders appreciate those long term relationships that offer repeat business just as much as you appreciate knowing how you will get your deals funded. When looking for a lender, please contact me! I work with a few trusted sources in the Boston area that I’ve known for quite a few years. I can make a connection for you. Typically they appreciate it more if you are bringing a possible deal to the table, but, it’s not absolutely necessary. These folks can also be used as a fail safe if you will. For example, you’ve got the property under contract, with a few contingencies so that you can get out of the deal (that’s another topic) if need be. You aren’t sure that you ran your numbers right and you are nervous. That’s ok, these folks will analyze the deal and they will let you know if you are on track. If it’s a deal, they will lend. If it’s not a deal, they will let you know and won’t lend. I have one who has been known to restructure deals so they do make sense for both the borrower and his company.
As always, if you have questions, feel free to reach out to me! I’m here to help!
Yours in success!
Bernadette Trafton, Boston AREIA Chief Connector