Ready to start investing, Should I use a hard money lender?

7 Replies

I'm not sure what your situation is but a great option that a lot of first home buyers use is an FHA or 203K loan. The down payment is minimal. It is what I'm planning on using when I move next year! If you've listened to the podcast, they use the term "house hacking," where you purchase a 1-4 unit with one of these loans, live in a unit, and rent out the other unit(s).

Good luck!

@William Carr sorry I didn't get back to you yesterday. In that case, I think a hard money or private lender would be a good route. We have formed a great relationship with a private lender and it has definitely paid off, even to the point where they are willing to give us longer term financing at a lower rate as well. Do you have much equity in the home you are living in? If you have a good amount, you could talk to your bank about getting a HELOC which would be helpful if you don't have money for the rehab.

@William Carr Hard Money is a great tool! However its expensive and you will need cash reserves. I like to see 15% to 20% reserves that are usable at a moments notice. this is because most hard money lenders work with a draw. This means that if you need to replace a roof and that costs you $10,000 you will typically need to pay that out of pocket, then we would send out an inspector out and reimburse you. Also unless you get a great deal with a solid ARV you will probably be bringing cash to close. Money is needed! Hope this helps!

@William Carr Unless you can use the house you currently own as collateral, you will need some money available as @Aaron Beauchamp has said. Lenders aren't going to lend you 100% of your purchase and rehab, and advance the rehab draws (and pay your points and fees and monthly interest payments). There is a misconception out there that hard money is for people with no money. It is the opposite. Hard money is for people leveraging the money they do have, they just need to do it quicker and easier than a bank can...

@William Carr As a beginner investor and not having that much money maybe a hard money lender might not be your best option. Most HL require you put 25% down of the purchase and rehab cost to get a decent rate of 9-11% with no points.  There are lenders out there that will provide 90% financing but it comes at a higher cost.  In addition, you should also think about closing cost and other things as appraisal, attorney fees, and title search. Good Luck!

A lot of new investors do use hard money because it's one of the only (if not the only) option that they can secure in a reasonable amount of time. There is always private money available but it takes time to meet people and get them comfortable with you/your business plan, etc. It's do-able, but sometimes paying a few extra percentage points on the hard money is worth the ease or procurement. Hard money is expensive, but if the deal makes sense, e.g., annual ROI of 30%+, it's an acceptable option. It's also nice to know that if the deal goes south, you aren't damaging a relationship with a friend or family member that might be willing to help you out on your first deal.