So you want to become a house flipper, like those on HGTV? Flipping homes is the best use case of hard money loans. But hard money lending is not for everyone. If there is a way to avoid it, you may want to find a different approach.
Before we get into all that, don’t forget to check out the other four articles in the series (101, 102, 103, 104). The purpose of the Creative Financing in Real Estate series is to give ideas on how to pay for your next investment property. With home prices going through the roof, we investors will have to use every trick up our sleeves to obtain property.
Now back to hard money lending. Hard money loans are loans from individuals or investors that base most of their investment thesis on the property that you are buying. The idea is that they can use your investment property as the collateral for the loan.
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Remember, investors base private money loans mainly on the individual taking the loan. Hard money investors ensure that if you can’t pay, the house will make them a nice profit.
When I think of hard money, I think of those old mafia movies where the guy taking a loan has to pay the “vig” in a quick timeline. The vig is the principal plus the interest. Hard money loans are not that nefarious, but I still would find a different funding source.
Hard money does come in handy in certain situations. Mainly for speedy loans that you need to close to get into a hot property. Going through a standard bank loan can take between 30-90 days, usually 45 days. Hard money can come in quickly to help you finance your fix and flip property.
Hard money is less concerned about your credit score and more with the investment property. Most hard money lenders have some background in real estate or construction and can tell if you have found a great deal or not.
Some real estate investors and hard money lenders form tight bonds, and they leverage each other for long periods. Like I said earlier, it is not a completely bad scenario.
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The best use-case for hard money is to get into an investment, fix it, and flip it by refinancing with a standard bank. So, perhaps holding the loan for 9-12 months. Why keep the loan for such a short period?
Interest rates on hard money are going to be high, very high. Probably in the double digits. Hard money does not have to consider the federal funds rate. The hard money lender is taking all the risk, and they are entitled to all the reward. That is how money works, you get rewarded for taking risks, and the hard money lender is taking a chance on your loan.
Hard money loans can also be very flexible because each loan is different and tailored to your unique situation. Also, they may charge you a high interest rate or points. They may also charge you a percentage of the profits. That may be a great way to avoid paying high interest rates while you fix the home. Then when you sell, a portion of the profits go to the lender.
There are many options to structure the loan to get into the best situation possible, but make no mistake, it is still going to be expensive. In today’s market, fix and flip properties will be selling for full market value, so hard money loans will be even more costly.
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Where do you find hard money lenders? Remember that article I wrote about becoming a real estate investor and agent? Yep, that is the best way to find a hard money lender by starting with your real estate agent.
When you are choosing a real estate agent, identify yourself as a real estate investor. Not all real estate agents want to deal with investors; many want to deal with first-time homebuyers and other standard buyers.
Real estate investors come with their own set of issues, such as finding portfolio lenders and hard money. However, the only way to become an investor is by having deal flow and capital. So when you identify yourself as an investor, savvy agents know that there can be many deals and money involved with partnering with you.
As I said in that article, real estate agents have their ears to the ground and meet all sorts of individuals in the real estate world. Hard money lenders usually don’t advertise so be prepared to present some of your other successful projects.
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Although the hard money lender is basing his investment thesis on the new property, they still want to ensure you are a quality person with whom to invest. Anyone can turn an excellent future investment into garbage; therefore, trust is vital.
So there you have it for hard money, it is there if you need it. I was never a fan of fix and flips because its usefulness rests solely on capital gains. I am not a capital gains investor; I invest for income.
Hard money is probably something that I would consider. If I found a fantastic deal, I would attempt to pool private money or partner with another individual investor. However, it is good to know that hard money is out there.
I can see myself becoming more of a hard money lender over time. That way, somebody is doing all the hard work of finding deals, and I can just want to fund the investments. Hard money can be a great source of passive income.
What do you think about hard money lending? Is it something you would consider in the future? Do you envision yourself as a flix and flip investor? Whatever the case, my job is to inform you of all options regarding investment money. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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