{"id":59323,"date":"2019-09-17T09:00:33","date_gmt":"2019-09-17T15:00:33","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=59323"},"modified":"2024-02-23T15:46:37","modified_gmt":"2024-02-23T22:46:37","slug":"8-things-real-estate-experts-wont-tell-you-about-hard-money","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/8-things-real-estate-experts-wont-tell-you-about-hard-money","title":{"rendered":"8 Things Real Estate Experts Won\u2019t Tell You About Hard Money"},"content":{"rendered":"\n

The biggest issue I hear when it comes to starting a house flipping business<\/a> is \u201cI have no money.\u201d<\/p>\n\n\n\n

In fact, the second reason is so far behind this one, it doesn\u2019t even register as a legit number two.<\/p>\n\n\n\n

Sure, being fearful<\/a>, not knowing what steps to take and wondering where to start also prevent people from flipping houses (all legit reasons by the way).<\/p>\n\n\n\n

But the \u201cI have no money\u201d sentiment is the No. 1 reason people don’t get started flipping houses. Would you be so scared if you knew about hard money loans<\/a>?<\/p>\n\n\n\n

Enter Hard Money\u2026<\/h2>\n\n\n\n

There are many ways to flip houses without using a lot of your own money, but the one source that\u2019s overlooked the most is hard money<\/a>.<\/p>\n\n\n\n

The majority of new investors have no idea about the benefits of using hard money. I\u2019m not exactly sure why this is\u2014but I think it\u2019s because many investors think it\u2019s a dirty source of money or has some kind of underworld connotations.<\/p>\n\n\n\n

That’s not true at all though.<\/em><\/p>\n\n\n\n

Hard money lenders<\/a> get a bad rap\u2026but they shouldn\u2019t.<\/em><\/p>\n\n\n\n

Related: <\/strong><\/em>The Ultimate Guide to Flipping a Property with No Money<\/a><\/em><\/p>\n\n\n\n

Hard Money = Bad Money?<\/h3>\n\n\n\n

Sure, there are some hard money lenders who are predators and want to see you fail so they can take advantage of you. I\u2019ve met a few, so I know they\u2019re out there.<\/p>\n\n\n\n

But those lenders are the minority.<\/p>\n\n\n\n

The majority of hard money lenders are legitimate businesspeople looking to fund legitimate projects without taking advantage of you, the new house flipper.<\/p>\n\n\n\n

The truth is I never could have started my house flipping business were it not for hard money lenders. Some started as merely business associates, but now consider them dear friends.<\/p>\n\n\n\n

So I\u2019m here to dispel those myths and call out hard money lenders for what they are\u2014a great source of funding for your flips.<\/p>\n\n\n\n

And knowing a little bit more about them may just help you get that funding for your first flip.<\/p>\n\n\n\n

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Discover hard money lenders on BiggerPockets<\/h2>\n\n\n\n

Access 150+ lenders who specialize in asset-based loans in BiggerPockets’ directory of hard money lenders<\/a>. No matter whether you’re fix and flipping or investing in long-term rentals\u2014or even need a bridge loan\u2014you can find a hard money lender who meets your needs.<\/p>\n\n\n\n

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Search now<\/a><\/div>\n<\/div>\n\n\n\n

<\/p>\n<\/div><\/div>\n\n\n\n

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8 Things the Experts Won\u2019t Tell You about Hard Money<\/h2>\n\n\n\n

1. Hard Money Is a Legitimate Business<\/h3>\n\n\n\n

Yes, it\u2019s true, hard money lenders are actual businesspeople.<\/p>\n\n\n\n

Hard money is basically a business or an individual who lends as a business. What that means is that they\u2019re no different than a bank\u2014at least to some degree\u2014because they in essence do what banks do, which is lend money.<\/p>\n\n\n\n

There is nothing scary about hard money but misperceptions of the \u201clegitimacy\u201d of these businesses still exist. I think some would-be house flippers think hard money is money borrowed over the black market or something.<\/p>\n\n\n\n

If you think this way, then I\u2019m glad you\u2019re reading this, because quite frankly, I didn\u2019t know the term either until I started investing.<\/em><\/p>\n\n\n\n

But the truth is that hard money lenders are legitimate businesses run as LLCs, S corps or sole proprietorships with a definite business structure and specific strategies for investing. A bank does the same sort of thing, but with a hard money lender, you don\u2019t have to be approved by home loan review committees, eliminating much of the bureaucracy that\u2019s involved with a bank.<\/p>\n\n\n\n

With hard money lenders, it’s just you, your deal and the judgment of the hard money lender to determine your ability to repay the loan.<\/p>\n\n\n\n

2. Hard Money Just Means the Loan Is Backed by a \u201cHard\u201d Asset<\/h3>\n\n\n\n

I didn\u2019t know this one when I first started flipping houses either.<\/p>\n\n\n\n

I thought the \u201chard\u201d part was\u2026well, I don\u2019t really know what I thought. I think I thought it meant there was some kind of \u201chard danger\u201d in dealing with people like this.<\/p>\n\n\n\n

How wrong I was\u2026<\/p>\n\n\n\n

The word \u201chard\u201d just means asset<\/strong>. So when you borrow money from the hard money lender, they secure their interest with collateral which is the \u201chard\u201d asset\u2014in our case, it would be the real estate.<\/p>\n\n\n\n

When you think about it, banks lend money in the same way\u2014although nobody refers to it as \u201chard money.\u201d<\/p>\n\n\n\n

\"hard<\/figure>\n\n\n\n

3. You Can Make Significant Profits With Hard Money Loans<\/h3>\n\n\n\n

Yes, hard money lenders do charge higher than average rates for a loan, no doubt about it.<\/p>\n\n\n\n

But it doesn\u2019t mean you can\u2019t profit\u2014especially if you\u2019ve done your house flipping math correctly by factoring in this \u201csoft cost\u201d to your equations. When you do this successfully, you can still make a nice profit.<\/p>\n\n\n\n

In fact, one of my best house flips<\/a> was funded by a hard money loan! So I’m proof you can definitely make good money on house flips from hard money.<\/p>\n\n\n\n

With hard money, you could be looking at rates of 12-18 percent along with two to six points. Pretty high rates, no doubt\u2014but you can still make money even with those costs.<\/p>\n\n\n\n

To be sure, you should exercise caution when using hard money. You want to be able to look at your numbers when going into a property and analyze them carefully, knowing full well your cost on borrowing that money.<\/p>\n\n\n\n

If you know your numbers cold and factor in your financing costs and still come out ahead per the 70% Rule<\/a>, then hard money is a good funding source for you.<\/p>\n\n\n\n

4. Hard Money Loans Do Work for Longer Rehabs<\/h3>\n\n\n\n

If you happen to get into a deal where you\u2019re paying an interest rate of 15 percent with three points, you\u2019ll want to calculate that in a deal analyzer and run the numbers and really see what that cost of money is going to be for different time scenarios.<\/p>\n\n\n\n

Run those numbers out for six months and really see what they come out to. Then take all your soft costs, one of which would be your hard money interest, add in the real estate commission of 5 percent and all your other costs. These holding costs<\/a> include utilities and taxes, as well as any maintenance that\u2019s needed.<\/p>\n\n\n\n

Then add up all those costs and then see what that number comes out to. Run them for 12 months too so you can plan your exit strategy in advance.<\/p>\n\n\n\n

If you still are in the black under this longer term \u201cworst case\u201d scenario, then hard money is a good funding source for you.<\/p>\n\n\n\n

\"businesswoman<\/figure>\n\n\n\n

5. Hard Money Rates Are High, But Here\u2019s Why<\/h3>\n\n\n\n

Hard money lenders know that house flippers coming to them are not going to be able to borrow money from a bank. It could just be that their credit might not be great or it could be that maybe they just didn\u2019t report income on their tax returns like they could or should have.<\/p>\n\n\n\n

Whatever the reason, the rates are justifiably high. They need to protect themselves from downside risk with you, so in taking that risk, the money they make should be higher.<\/p>\n\n\n\n

Remember: no risk, no reward.<\/em><\/p>\n\n\n\n

6. Legitimate Businesses Do Business With Hard Money Lenders<\/h3>\n\n\n\n

There are many reasons why people can\u2019t do business with banks. Just because you may not be able to get a loan from a bank does not mean that you\u2019re not bank-worthy, per se.<\/p>\n\n\n\n

All it means is that with the strict guidelines, it\u2019s harder for banks to lend money out\u2014even if they feel good about lending to an individual.<\/p>\n\n\n\n

Maybe it\u2019s a small business and they did some creative financing with their accountant and the bank\u2019s like, \u201cWell you say you made $100,000 but it shows you made $50,000.\u201d<\/p>\n\n\n\n

If this is the case, it means you may be very bankable, but because of how your tax returns look, you become ill-suited for a traditional loan.<\/p>\n\n\n\n

This is the reason why so many legitimate businesses use hard money loans\u2014not just in real estate\u2014but in all forms of business. This includes funding for capital equipment and for continuing operations.<\/p>\n\n\n\n

Hard money is not just a real estate thing, it\u2019s for all kinds of business financing, as well. In many cases, if a business owner cannot secure traditional loan funding from a bank, they turn to hard money. Whether it\u2019s for a business owner to buy or lease new equipment, purchase supplies and inventory or remodel their offices, many businesses use hard money loans just like us real estate investors.<\/p>\n\n\n\n

Related:<\/strong> What Would You Do With This Evil Hard Money Lender?<\/a><\/em><\/p>\n\n\n\n

7. Hard Money Lenders Typically Won\u2019t Finance 100 Percent of the Loan\u2014But That\u2019s OK<\/h3>\n\n\n\n

There\u2019s a concept called \u201cskin in the game.\u201d Have you heard of it?<\/p>\n\n\n\n

What it means is nothing more than, \u201cAre you putting any money into the deal?\u201d<\/p>\n\n\n\n

Most hard money lenders will want to know if you have skin in the game. If you don\u2019t, they typically will not loan you the money, unless<\/em> they\u2019ve done business with you before.<\/p>\n\n\n\n

The truth is that when you talk to a hard money lender and you have no cash, then they will look at you a little bit differently.<\/p>\n\n\n\n

I\u2019m not saying they won\u2019t do the deal in all cases, but I can tell you that when you have your own cash in the deal, they know you have a lot more riding on it and are far more likely to fund it.<\/p>\n\n\n\n

When you have \u201cskin in the game,\u201d they know their interests are protected because you don\u2019t want to lose your money as much as they don\u2019t want to lose theirs.<\/p>\n\n\n\n

It stands to reason. If you were a hard money lender, would you want to lend to a house flipper who has no money to lose?<\/p>\n\n\n\n

You probably wouldn\u2019t, but don\u2019t let that stop you. Even with no money, you can get the deal done.<\/p>\n\n\n\n

\"wallet-money\"<\/figure>\n\n\n\n

8. If You Have Zero Money, You Can Still<\/em> Get the Deal Done<\/h3>\n\n\n\n

In the beginning, you need to have skin in the game. But funding that portion of the deal through any of your own resources isn\u2019t as difficult as you would think.<\/p>\n\n\n\n

You probably have at least one of these: some savings, an equity line of credit, credit card, or whatever means you have to put up the percentage required.<\/p>\n\n\n\n

And even if you don\u2019t, all is not lost.<\/p>\n\n\n\n

It just simply means you will have to work a little harder than someone who has money to invest. But that shouldn\u2019t stop you. You just need to get creative<\/a>.<\/p>\n\n\n\n

You could fund your portion through a friend or a family member or a business associate or a partner.<\/p>\n\n\n\n

With the hard money lender\u2019s loan, the good news is that the amount you need to borrow is a far smaller amount of money than before the hard money loan.<\/p>\n\n\n\n

This can be the difference between looking for a thousand or tens of thousands of dollars and looking for multiple hundreds of thousands of dollars (depending on your market).<\/p>\n\n\n\n

The smaller amount is far easier to raise than the full amount\u2014and between the two, you\u2019ll have full funding for your flip.<\/p>\n\n\n\n

Have experience with hard money lending or flipping houses with no money? <\/em><\/p>\n\n\n\n

Share in a comment below!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Hard money loans are one of the most overlooked sources of funding for real estate investors. So many looking to get into house flipping or other areas of real estate use the \u201cI have no money\u201d excuse. But there are many ways to do deals without using your own cash\u2014and hard money is one of the best. Here’s why.<\/p>\n","protected":false},"author":749,"featured_media":116262,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7403],"tags":[],"class_list":["post-59323","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-private-money"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/59323","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/749"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=59323"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/59323\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/116262"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=59323"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=59323"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=59323"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}