It’s no secret; savvy investors know that they need to compliment their private money sources with a hard money lender. That said, I could argue that a hard money lender is the most important person you will work with on a project at any given time. Just like private money lenders, hard money also typically covers the cost of purchase and rehab expenses. However, hard money lenders are typically more organized and semi-institutional. Perhaps even more importantly, however, they have been licensed to lend to investors like yourself.
Hard money funding is typically distributed in draws against the work being done. It is, therefore, relatively common for a hard money lender to set up a payment schedule for completed work.
It is also important to note that the term “hard money” does not imply a degree of difficulty in acquiring said funds; in fact, it’s quite the contrary. While the terms and criteria that accompany a hard money loan can be extensive, they are typically easier to overcome and more reliable than your standard institutional lender. If for nothing else, receiving hard money approval is easy in the face of a promising asset. You see; most hard money lenders make their decisions based off of the asset in question. It isn’t until after the home has been deemed promising that they will even see if the borrower qualifies. In other words, the more promising the project, the more likely you are to receive a hard money loan.
While hard money is certainly a bit more expensive to borrow, it is more reliable. That said, it is not subject to traditional credit guidelines (the same ones that protect banks). Instead, fees for borrowing hard money are often delineated in points (three to five to be exact). Points represent an additional upfront percentage fee based on the loan amount. It is important to note that these fees are not universal, and different hard money lenders will bring different terms to the table.
Subsequently, hard money lenders are trying to mitigate risk by increasing interest rates, thus charging investors more for their services. But that increased rate is more than worth it, considering investors will be able to move on deals much faster than they would be able to with a traditional loan.
It is rare that a hard money lender will fund an entire deal. It is more common that they will only fund a percentage of the purchase price or the after repair value (ARV) – usually, around 75%.
In the end, chances are a hard money loan is your best bet to secure a deal with a great profit margin. While five points may sound difficult to overcome, sometimes the profit margins awarded to those who can close on a home quickly are well worth the investment.
Even with all of this in mind, investors are still advised to use caution when working with a hard money lender. I encourage you to have multiple exit strategies lined up in the event something unexpected happens.
Private hard money lenders have become a trusted source of funding for real estate investors on nearly every level, regardless of their experience. Both hard money and private money, for that matter, have become the backbone of any successful real estate entrepreneur. You simply can’t beat the speed and efficiency they have to offer. While they may come with a heftier price tag, I can assure you their positives greatly outweigh their negatives.
