BiggerPockets

I have been a hard money lender for the last 10 years. Hard money should be used only in very specific and limited circumstances. Many real estate investors use hard money as a substitute for conventional financing when conventional financing is not available. This often makes no financial sense and the end result is the investor not accomplishing their goals. Hard money can not be used successfully long term or on investments with average profitability. On these type situations the borrower ends up paying all profitability and then some to the lender.

HI,

If some buddy is investing in the real estate then the term financing is very important.

No one can invest a lot from the start and that's why the financing is better option.

Thanks

Conventional lenders have guidelines about the property quality. They also lend based on purchase price. HMLs will lend on junky properties, and will base the value on the work you propose to do.

Hard money makes sense for buying junkers, fixing them up and then either selling them or refinancing into a conventional loan.

An example.

Property value fixed up (ARV): $100K
Purchase price: $55K
Rehab work: $15K
Conventional max LTV: 75%, based on purchase price
Max conventional loan: $37,875
Cash required: $31,125
HML max LTV: 70%, based on ARV
Max HML: $70,000
Cash needed: $0

Now, that's not exactly true because a HML will have steep points and interest, so you'll have to cover those as well as covering the closing and holding costs. So, realistically, you'll need about $10-11K to do this deal with hard money. You'll have points, closing costs, and holding costs on the conventional loan, too, about $4-5K total. So with a conventional loan you would need about $35K to do this deal, with hard money you can do it would about $10K.

Terms on hard money are typically 6-12 months. If you can't sell in 6-12 months, you'll be expected to quietly hand over the property.

Hard money is typically only for investment property, not for a property you're going to occupy.

HML's obviously has it's uses...

But why end up potentially paying 12-15% plus 4-6 points and have to have some skin in the game when you can educate yourself on how private mortgage lending works ( NOT the same as HML) If you are in RE for the long haul then not learning how PML works and how to find/educate your own lenders is crazy. Besides that's all HML's do. They find someone happy w/ receiving a nice 7-12% return secured by real estate and broker out that lenders money to other RE investors and collect the spread. You can be the one who finds your own PL's for your own investments.

Bottom line with HML you are not in control. With PML you are. The caveat/value for the potential PML is an alternative for secured returns backed by real estate purchased at significant discounts (60-70 LTV's.... and depending on your local market, a quick flip or long term hold - lease/option) as an exit.

Out of all the 1 on 1 presentations I've given, I have only ran into one individual who actually knew what PML was. Once a person understands the program and you present yourself as someone credible then games over.

People have been sitting on the fence and are ready for something new (in their eyes) where they can recoup some of the losses in the last few years.

Educate yourself on this subject, research and find someone/course who can show you it works. It's one of those investments you make in yourself that is WELL worth every penny.

Hope this helps