A hard money lender is an integral component to any sustainable real estate investment company. However, to take advantage of the opportunities they are fully capable of providing, you must understand a few things first.
Real estate is a people business; it always has been and always will be. The success or failure of your entrepreneurial endeavors is entirely contingent on those you choose to do business with. Not surprisingly, one great relationship with the right individual can very easily propel your business to the next level. Therefore, I encourage you to forge a working rapport with those people you are convinced can elevate your efforts.
There is one group of people, however, that may be more important than any other: those with money that are looking to invest it. Otherwise known as a hard money lender, these individuals can provide you with the funds necessary to take on a deal, or two, or even three. For all intents and purposes, a hard money lender should serve as your main source of funding in the early stages of your investing career.
I highly encourage real estate investors – whether they are new to the game or have been seasoned over decades – to position themselves in front of people with capital. I can think of nothing else that is more advantageous to a new real estate investor than fostering relationships with hard money lenders early on in their careers. Consequently, the earlier you can become acquainted with a trusted hard money lender, the sooner you can start developing a track record; something I can assure you will come in handy down the road when you are in desperate need of funds to close on a deal.
My partners and I at CT Homes have had a great deal of success working in tandem with hard money lenders that specialize in rehab projects. Those with knowledge of the industry are more prepared to handle what is in store. The degree of risk that has become synonymous with a typical rehab project isn’t enough to deter them away, but rather an incentive to do business. That’s probably because a well-planned rehab project is more likely to pay out than most other investment vehicles. They simply manage to compensate for said risk by offering higher interest rates than traditional banks.
However, while interest rates through a hard money lender may be higher than institutional lenders, they are not without their advantages. In fact, the speed and efficiency a hard money lender can award savvy investors is more than worth the high interest rates they incur.
It is important to note that hard money lenders can bring a lot more to the table than just funding for your next deal. They are typically tapped into an entire network of like-minded individuals; many of which may be interested in doing business with you on one level or another.
No relationship comes to mind that is more instrumental in moving a business forward than the one that comes with a hard money lender. But to understand how hard money can help your business, let’s first examine what it is.
Hard money lenders are organized, semi-institutional lenders that lend their capital on the premise that they will get their money back with interest. They are known for their ability to provide short-term, high-rate loans with fees that permit investors such as yourself to purchase and rehab properties.
Unlike that of a traditional lending institution, hard money lenders offer investors the ability to borrow on a short-term loan; typically anywhere from six to 12 months. They also tend to loan for both the purchase of the property and the subsequent rehab construction costs. The ladder is usually distributed in draws against the amount of work being done. Essentially, draws and payments are distributed upon completion of predetermined projects.
Don’t let the scheduled allocation of funding convolute your concept of hard money lending. In fact, hard money lending is not nearly as difficult as its name would lead us to believe. While the terms and criteria required to receive hard money loan approval are extensive, they are typically easier to meet and much more reliable than traditional loans. Whereas traditional lending institutions place a great deal of weight on personal finances and credit scores, hard money lenders place a priority on the asset in question. The more promising the property is, the more likely you are to get the loan you want. Only after a property has been deemed worthy will a hard money lender inquire about your personal situation. That means it is entirely possible to receive hard money approval when facing a bankruptcy, foreclosure or even bad credit scores. They essentially look at the quality of the deal ahead of the person looking to undertake the rehab.
Of course, the benefits of funding deals with hard money don’t end there. Not only does it allow you to get funding with less than perfect personal credentials, but it also takes significantly less time. Most real estate deals are time sensitive, and hard money is the best way to see to it that you have funding on hand whenever necessary. It is not uncommon to close on a transaction with hard money in as little as three to 10 days. The speed and efficiency of a hard money loan are perhaps the best way to make sure a seller picks your offer.
As for the loan itself, the amount is typically based on the property value and the purchase price. That said, it is common practice for hard money lenders to lend approximately 60 to 75 percent of the after repair value (ARV). Of course, each lender will have their own unique terms, but I have found this spread to be somewhat universal.
Not surprisingly, hard money lenders charge high interest rates to compensate for the risk they are taking on. That said, they will charge somewhere in the neighborhood of three to five points on top of interest rates that can reach as high as 15 percent. But don’t let their comparatively high costs scare you away. The speed in which you can receive hard money is worth putting up with the high costs.
It’s safe to say that the average real estate investor wouldn’t be able to get many of their deals without the help of a hard money lender. If for nothing else, the speed in which they can help you receive funding is worth the added cost.
Above all else, you must remember that hard money lenders want to work with you as much as you want to work with them. Just be sure to use caution whenever borrowing from a hard money lender. It is wise to have multiple exit strategies in place should something force you to deviate from your original plan. That way you aren’t stuck with a debt you can’t pay back.