“Hard money is for suckers!” Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free That is actually the first thing that popped up for me when I Googled, “What is hard money?” Do you think, just maybe, language like this is why there is so much confusion around the subject? Or is it because of what I saw halfway down the same page, which read said: “Hard money is called hard money because it is harder to pay back than soft money.” The author went on to say it is harder to pay back because of the high interest rate compared to soft money—which is true, I suppose. I just do not think it makes the subject any less confusing. Either way, I would like to go through my last hard money deal in detail and share my whole experience. Real-Life Example of a Hard Money Deal Pre-Purchase Details: Location: New Britain, Conn. How I Found It: MLS (just before the market turned hot—would not get this deal on the MLS now in this area) Class: C class Property Type: 3 family Year Built: 1924 Square Feet: 4,035 Bedrooms/Bathrooms: 6/3 Garage: 2 car Asking Price: $186,000 (original) $139,400 (after numerous price drops) Type of Sale: Foreclosure Condition: 3 (1 being the worst/10 being the best) As-Is Appraisal: $125,000 Post-Purchase Details: Purchase Price: $123,000 Budget for Repairs: $55,300 (can provide budget spreadsheet upon request) Major Repair Items: All new siding, all new windows (50), new kitchens (3), all new paint, new boilers (2) Appraised ARV: $255,000 (Please note: This was before repairs but was valued by an appraiser based on the scope of repairs provided on the budget spreadsheet.) Hard Money Details: Term Length: 12 months Loan Details: 85% of purchase/100% of rehab Interest Rate: 9.99% Points: 2.75% Costs Not Covered by Hard Money Loan: Down Payment: $18,450 (15%) Earnest Deposit: $1,000 Total to Close: $29,046.07 (includes fees, down payment, earnest deposit, pre-paids, etc) Appraisal: $600 Insurance: $1,516.84 The money for these additional expenses came from my savings, which I earned through my 9 to 5 job. What I Learned From My First Hard Money Deal This is one of those projects where, if I knew what I was getting into, I would have been much more cautious or pessimistic. I could not be happier that I did it and gained the experience, but it was one heck of a ride. Related: The Ultimate Guide to Hard Money Loans I purchased this property on May 17, 2018. I had 12 months to rehab, rent, and refinance. I refinanced out of the hard money loan on May 14, 2019. Does it get any closer? Let’s talk about what happened between those dates. I went into that deal wide-eyed and bushy-tailed, as they say. I came out looking like I had been hit by a truck. However, even though I was in some pain, I was a lot wiser and more confident about the process. 3 Mistakes When Using Hard Money Mistake #1: Actually thinking hard money covers ALL repairs. Reality: Hard money covers what you agree on for repairs at closing. Why It Mattered: The loan covered the $55,300 that I originally anticipated. Everything else came out of my pocket. This really hurt. I quickly learned that nobody on the planet has ever nailed their budget down to the dollar. If you have, it is probably blind luck. There are going to be unforeseen issues. I do not care if you have an inspector come out or not. X-ray vision is not available to the public, so anything behind the walls is completely unknown. Here are a few items that came out of my own pocket: $6,000: This was to repair the majority of the plumbing in the house. This needed to be done mostly because someone went in at night and ripped out and/or damaged nearly all of the copper pipes. $9,000: Expanding the driveway. This should have been budgeted. I was ripped off by two contractors who did terrible work for about $3,000. I finally found an incredible driveway guy and he transformed the space for about $6,000. $7,500: Replacing the roof—pure stupidity that this was not on the original budget. $4,500: Replacing siding and roof on the garage. This is something I decided to do because the garage looked so awful next to a newly remodeled main house. These items really put a dent in my wallet. What's worse is, for much of this remodel, the house is not rented so it is generating $0 income. Furthermore, I am paying anywhere from $1,100 to $1,300 per month in interest to carry the property under the hard money loan. The interest gets higher each month as you draw out more for the rehab. Mistake #2: Thinking I would just have access to the rehab budget as I needed it. Reality: The money for repairs would be given out on a draw. Why It Mattered: I had to front large amounts of money for materials with no reimbursement until that specific job was completed and inspected. This was another one of those items that I should have known. They do not just give you the rehab money. They did not just write me a check for the $55,300 in repairs. This is how a typical line item on my budget went: I would put the materials for the job on my credit card or pay it from my bank account. Contractor would work on the job and complete it as soon as possible. He would be itching to get paid for his labor costs. He would be really itching to get paid. I would be sweating about carrying this unreimbursed balance. I would contact the inspector a day or two ahead of completion to allow for their two- to three-day lead time. They would inspect the property, take pictures, and sign off that it was done. The inspector sometimes would only mark it as partially done. This means I would only be reimbursed to whatever percentage they noted as complete. Inspector would submit his report the lender. Lender would notify me that a wire would be sent out in two to three days for the specific items noted as complete/partially complete by inspector. Funds would be received, and I would pay the balance owed to contractor and reimburse myself. Breathe. This one was especially important. I remember walking around this rundown property for the first time AFTER I already purchased it. My contractor was like, "Wow, this needs a ton of work!" I laughed it off, because why not? My hard money loan was just going to pay for everything, so I did not really care. That laughter soon turned to tears. Well, not really, but close enough. Lesson learned. Also of much importance, make sure you have cash reserves or a credit line or credit cards lined up and ready to cover these out-of-pocket costs. Mistake #3: Thinking I had more time than I really did. Reality: Twelve months fly by. Why It Mattered: Going past the 12-month term means the lender increases the interest rate and you risk losing the property. As mentioned, this property was purchased in Connecticut. It snows there from November to March—and sometimes even later. When we purchased the property in May, we planned to have this thing rocking and rolling before the first snowfall. We would work on the interior first, so that we could get it rented sooner, and then move to the outside. By the time we got to the outside, it was snowing. This blew up our timeline. We ended up being able to rent it starting Dec. 1, 2018, and it was fully occupied by Jan. 31, 2019. By the time the snow melted and the freezing temperatures went away, we were only a few months from our deadline. Furthermore, I knew it would take a bit of time to find a bank I wanted to work with and one that wanted to work with me. During the course of this final stretch, it was not smooth sailing. I was running into all sorts of issues. The driveway had turned into a massive mud pit. I had a contractor's van buried up to its bumper in the mud. I had tenants stuck in their new cars so badly that I had a tow truck say, "Sorry, can't help you. I do not want to risk getting stuck, too." When they finally got out, there were electrical issues with the car after being in mud for so long. In the house, I was also having issues. This property had not been occupied in two years—no water running through the boiler system or anything. But it had signs saying it was “winterized.” It either was not winterized, or it was not done correctly. Most of the pipes burst. We thought we fixed everything; however, every now and then we would spring a leak and disaster would ensue. Also, let us not forget that this is the first time the sewage lines had been working in a while, too. I rent everything by the room, as you may know, so I had nine tenants living in the property rather than just three tenants renting each unit. This extra load on the system backed up everything into the basement. Furthermore, the cast iron main stack was reaching its own limit and starting to leak. Related: 5 Pitfalls of Renting by the Room (& How to Solve Them) Eventually we fixed everything. I was dangerously close to the end of the term, but the refinance was moving along at a good pace with the small local bank I got hooked up with. The Refinance and Other Important Numbers I want to transition to some numbers for you: Purchase: $123,000 Down Payment: $18,450 Principal Amount: $104,550 Rehab: $55,300 Total Loan: $159,850 Final ARV Appraisal: $255,000 (first appraisal came in at $250,000. I provided support and asked it be moved to $255,000. This does not always work.) Cash-Out Refinance (75% of ARV): $191,250 Gross Cash-Out Amount: $31,400 ($191,250-$159,850) Net Cash-Out Amount: approx. $19,000 (after closing costs) New Loan: 5/1 ARM at 5.7% amortized over 20 years (wish I had gotten a 30-year, but it did not seem possible at the time, as nobody wanted to finance rent by the room and I was running against the end of the term—this has since changed) There it is. I walked out with a check for almost $19,000! Well, hold up. That doesn’t include overages on the rehab budget and the interest payments that I was making all along. All told, the $19,000 did not cover all of that—but it was somewhat close. Either way, I did not leave a ton of money in the deal, which is good news. Rental Details Rent: $595 per bedroom (9 beds/includes utilities) Garage: $75 (rented to contractor at a discount) Mortgage: $1,850 (PIT–doesn’t include insurance) Gross Monthly: $5,430 Renting by the room is my go-to strategy. It is all I do. The property cash flows well. As you may know, I am also self-managing. Never a dull moment! I really hope this helps some of the people who have questions about hard money. My lender was awesome. He took the time to explain things to me. Anything I did not realize, in my opinion, was on me. All told, I am big proponent of hard money. I want to get the deal done and am willing to pay the high interest and applicable fees to do that. For me, spending inordinate amounts of time with a traditional lender that wants an arm, a leg, and your first-born child just isn’t worth it. Is there anything else you’d like to know about hard money that I haven’t covered here? Ask me in the comment section below.