Hard Money is a terrific way to get funding for your rental properties. Now I know it may sound weird since hard money loans are for short terms and high points, but…
If you purchase a rental property with a hard money loan and then refinance the property into a conventional 30 year loan, you have a rental with little to no money in the property.
If you learn how to invest in real estate with an investment property that makes you money every month and no money out of your pocket.
Definition of Hard Money
A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies.
Now, if you just look up hard money in a search, you may also find political hard money definition and use of the term. This not what we are talking about.
The definition of hard money we are using is when an investor borrows money from a company (not a bank) for the purposes of investing in real estate. Also, when you learn what is hard money loans and how they can grow your real estate investing business, you will find an untapped resource for more properties.
What is hard money loan and why would we use it?
Do hard money is all about leverage. It is the principle of using other people’s money, and the concept is called leverage. If you want to move a big boulder, you can push on it all you want, but if you get a long enough lever and yank on it, you can move it.
Capital allows you to leverage.
This can be good or bad. It isn’t hard to get leverage or even get hard money loans. This is because you are borrowing against a hard asset and that is something tangible.
Watch the Do Hard Money Lender Episode
If you go to a bank, they will ask about your job, how long you’ve been there, your credit score, etc.
They look at soft assets.
They are mainly looking at the probability of you being able to repay the loan, based on your historical performance. They base their decision on those factors.
If you go to a hard money lender, they are going to say they won’t lend to you if the property is owner occupied. They look at equity.
Hard money lenders don’t care if you have a job or any of those things the bank looks at. It boils down to how much is the house worth and how much are you buying it for.
If a borrower can’t pay, the hard money lender will sell the property and get their money back that way.
They analyze deals based on the hard asset, not the soft assets.
The hard asset is the property, the soft asset is the person borrowing.
What are the terms like and what are the interest rates?
There are a lot of ways to use hard money, and a lot of people say it is expensive.
It isn’t expensive if it allows you to do deals you wouldn’t otherwise be able to do.
If you wanted to buy a property, fix it up, and sell it, you would probably need to get hard money or a line of credit, because a bank is not going to give you money for a property that needs work.
Listen to the Do Hard Money Lender Episode
When Ryan first started, he got 80/20 loans. Before 2008, he could get 80 percent financing from one lender and 20 percent from another for 100 percent financing. This is outlawed today.
Get a hard money lender, get the purchase, get the rehab all rolled into that, and then refinance with a traditional bank once the property is in good shape. This way you have little to none of your own capital invested in the property.
There are not a lot of true hard money lenders out there. A hard money lender is looking at the assets and nothing else about you and your history.
This can help someone get jump started into owning a rental property with little money.
Hard Money Lenders Will Help You To Know If You Are Buying A Good Deal
When you are an asset-based lender, it is really about what is this property worth or what would it be worth if certain things were done.
Hard money lenders like to look at it using the after repair value. It is an art and a science. They look at what properties are selling for in good condition, what will it take to get this property to good condition, and how much are you buying it for.
If you are buying a property and the after repair value is $100,000, the maximum that most true asset based lenders will do is $70,000 (70 percent). If you can buy the property for $50,000 and put $20,000 of repair into it, you would get the full loan amount.
If you could get it for $45,000, you may be able to get all of the money for the purchase, the rehab, and finance some of the closing costs. This is the ideal situation, if you are looking for cash flow.
After a few months, go to a bank, refinance, and pay off the hard money lender.
What would a hard money lender typically charge for points, the fee for using the money?
It is hard to say, because it is all over the board.
It could be as low as two or three points with experienced borrowers, and with brand new borrowers five or six points.
Interest rates will vary from 12 percent to 18 percent. It depends where you are in the country as well.
The reason banks are able to charge lower interest rates, is because they are borrowing money from the Federal Reserve at 0 percent, or they are getting paid to borrow it.
The Federal Reserve is basically saying we are going to give you money and if you use it, we are going to give you more money and pay you to use it.
They want to keep the whole economy buzzing and moving.
When you are dealing with a hard money loan, you are dealing with private individuals, or maybe hedge funds, that are putting up the cash. The are not getting all of that money, they need to pay the investors, and the investors want to get a good rate of return.
Lenders are taking on more risk, because the borrower is not putting any money into the deal. You are paying for a risk transfer.
If you put money into the deal the terms may be less.
If you don’t have the money to put up and it allows you to do a deal that you would otherwise not be able to do, it may be a good deal.
Ryan had a guy thank him for letting him buy a property from him years ago, because the value has since tripled and rents went up.
Hard money is more expensive, because it is from private individuals and they are not getting paid by the federal government to borrow money from them.
Step-by-Step Process to Do Hard Money Loans
A hard money lender is your last line of defense.
Assuming you found a property and have it under contract, the first thing the hard money lender will do is look at the situation and value the property. They may come back and say it isn’t a good deal. It can give you some confidence.
Even if you have some money to put down, you will be money ahead with a hard money lender, because they will tell you if it is a good deal or not.
First step: Valuation.
Make sure the value is there in the property before you buy.
Second step: Contractor bids.
The hard money lender wants to vet contractors to make sure the pricing is good.
People get in trouble with this all the time. The lender wants to make sure the contractor is licensed, insured, and the pricing is right.
Once the contractor and bid vetting passes, the deal closes.
Third step: Project management and draws on the money for rehab.
Pay your contractors and complete the rehab.
Fourth step: Place a tenant.
Most hard money lenders want an assignment of rents.
This means if you aren’t paying them, the tenant would pay them. The lender will want a copy of the lease and contact information for the tenant.
Fifth step: Rate and term refinance.
You take the asset to the bank and show them the rent.
Get a new interest rate and term, because hard money is short term (five months, six months, eight months, etc).
There are hard money lenders that are sharks that loan to own and just want to end up with the property.
Most of those are going to require big down payments and lots of money. If you have a lender who is risking most of their money, they are probably not a loan to own lender and they want to see you succeed.
Turning A Hard Money Property Into A Long Term Rental Asset
Hard Money Lenders do not want the property, they want their money back and a whole bunch more friends to come back with it.
Ryan recommends refinancing to a 30-year fixed rate mortgage, because interest rates are so low. Even if you are overpaying for the property, the interest rate makes up for it.
When Ryan started, he bought his first property with an eight or nine percent interest rate, and interest rates are now around four percent.
The big key is if someone is going to use hard money, they should look into getting pre-qualified for a loan at whatever dollar amount they will eventually want to borrow.
If you can’t refinance, you can sell the property with the tenant as a cash flowing property or without a tenant to a homeowner.
Don’t get too caught up in the “oh no” factor. Get help, get people around you, get a good lender that will work with you, and keep moving forward with whatever cards you are dealt.
Play the best hand you can.
The downsides of hard money lending and what could actually happen.
With most hard money lenders, if you aren’t putting up any of your own money, you are going to put up a personal guarantee, which means you are personally liable for paying back the loan.
If you start getting yourself into trouble, the worst thing you can do is hide. Hard money lenders want communication.
They want to know if you are running into problems, because they are in this with you and they want to get you through this to the other side.
If you are working with the lender, they probably will not take the property from you.
Ryan can’t guarantee that, because legally they have a right to take it, but that isn’t their intention. If you are there and you are on the ground dealing with it, if the lender takes it back, they will need to do the same thing.
The more evidence you can show that you are not joking around is really big for a lender. If you run into a problem, tell the lender and show them documentation.
That builds trust in the relationship and it will win you tons of points later if you run into a problem.
Worst case scenario, you could lose the property. The hard money lender has the right to come in, take the property from you through a process, usually foreclosure.
The lender gets the property back and then they sell it. If they sell it and lose money, they could go after the borrower for the difference.
If you buy the property right, that typically doesn’t happen. It would have to be a catastrophic event. It could happen, but it doesn’t happen a lot and Ryan doesn’t think it is a reason to not invest.
The risk of not getting cash flow is so much greater than having to lose a property to a lender.
There is a huge opportunity cost there.
Is there anything else we should know about hard money lending?
Some takeout financing will want you to hold the property for a year or two years before you actually do the refinance.
Make sure you are working with someone who doesn’t care about any seasoning on it. Maybe six months seasoning could work. It is important to know.
If you are not working with a hard money lender, you are going to have a much harder time getting all of your money back. When you do the refinance, it is not like you can get extra cash out. Most refinances will not do that.
If you borrowed $50,000 from Ryan and you put $20,000 of your own money into the property, most banks will refinance $50,000 and not the other $20,000.
Even if you do have some of that money, it is advantageous to get a hard money loan so you can refinance all of that money back out.
Banks don’t want to refinance what you put in, because they want you to have some skin in the game. If someone else takes the risk first, banks feel better about it.
A cash out refinance on a non-owner occupied property is extremely difficult to get if not impossible, unless it is owned free and clear.
How else can somebody find more about Do Hard Money?
- Get a down payment faster with greater returns on your money with Ticker: HOM
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- How to Get Portfolio Loans for Investing in Real Estate
- The Secret to Investing in Real Estate
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