HARD MONEY is NOT a good idea.
Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
I know I know everyone advertises hard money as this great way for newbie investors to get their feet wet and invest in deals they couldn't otherwise afford blah blah blah.
Let's all be real here folks. Hard money is NOT a good idea for you newbies out there. Markets are tight. Competition is fierce. If you are using hard money lenders you'll be pinched from a profit perspective. Not to mention you are new so you'll be pinched on the rehab since you've got no idea or track record. Lastly you'll get pinched on the purchase because hard money offers are way weaker than cash and sometimes even traditionally financed offers from a seller's perspective.
Thoughts?
Having talked to over 100 HMLs, personally borrowed from a couple dozen of them myself over the past 5 years for my own investments, brokered for them, and now am a hard money lender... let me offer some different perspectives.
I definitely applaud those who can avoid hard money and afford to buy deals in cash, but that's not a realistic expectation in the coastal markets. I'm from Seattle, where the average price of a home is $700k-$800k. We're still seeing 15+ offers for an ugly unlivable house that's newly listed on the market, and I can tell you the vast majority of those are "cash buyers" who are financing with hard money. We have HMLs that can move pretty fast here and can fund within 48 hours; actually, half of the local HMLs can fund same-day at the auction. Local hard money terms here are about 12% interest and 2-3pts for 6 months. However, there's been a large influx of out-of-state lenders over the past couple years, and you can somewhat easily get a hard money loan, even as a brand new investor, for around 9% and 1.5-2pts these days for a 1-yr loan.
At the same time, I've invested in 8 other states; my cheapest purchase was a $22k property in PA. I know that hard money financing in lower cost markets can be pretty expensive, especially when the loan amount is < $100k. In some parts of the midwest, 15% and 6pts is the norm. Heck, in Brandon Turner's old neck of the woods (i.e. podunk WA), there was only one hard money lender in town and he was charging 10% interest and 10pts. By the way, he's still actively lending in that area; he has no competition doing $50k loans in rural areas.
I'm curious - for those who are saying hard money is insanely expensive, on which end of the spectrum do you fall under? I'm also curious to know what experienced investors are paying; in my experience, getting 8% and 1pt hard money shouldn't be that difficult if you're an experienced investor with strong financials (i.e. credit and liquidity). We've even done loans at better terms than that in the past.
I treat my HMLs as my partners, as an extra set of eyes on my deals. If they're not going to lend on something, it's probably not a good deal, especially if you're a new investor. HMLs do their own comps, maybe their own appraisals, review your budgets/scope of work, and conduct their own inspections on draws (when they fund the rehab) to ensure that the contractor you're paying is actually doing work that adds value to the house. Sometimes they give out referrals to insurance, title/escrow, attorneys, wholesalers, etc. Is it not valuable to have a lender say things like, "Did you know this property was in a flood zone?" or "we're not seeing market rents that high" or "the crime rate in this area is higher than what we're typically comfortable with." As an out-of-state investor who has never seen any of his properties in person, I find these things incredibly valuable, and it has saved my butt plenty of times.
I can't tell you the number of times a new investor has come to me with a bad deal they to finance, and I tell them to walk away from it. It sounds counter-intuitive since I as the lender just lost a loan, but I can tell you that I won a client for life because I looked out for them. Did you know that a lender can always protect themselves, even on a bad deal? It's easy; they just lower their own LTV and make you put in a higher down payment. Even if there's no margin on the deal (i.e. cost to ARV is 90%), they can create margin for themselves and protect themselves using your down payment. Your job as the investor is to align yourself with great partners, which includes working with great lenders who don't choose to do loans that they know will screw over an investor. A lot of those folks are what I call "loan to own" lenders.
I know a lot of investors think, "Why won't you do this loan? The LTVs are insane! I'm buying this thing at half price!" @Steve Morris A good, true lender never wants to take back a property, even at 50% LTV. Do you know why? Because a lender wants to be a lender. They don't want to fix up houses, manage contractors, manage tenants, list properties for sale, etc. They have great processes and efficiencies made for lending, not for owning properties. Every house they take back in foreclosure screws them up, and also gives them a bad rating. That's why what an investor thinks is a good deal does not align with what a lender thinks is a good deal.
True lenders want zero defaults (even if it's not realistic). There are 3 mitigating factors to consider (from the borrower): experience, credit, and liquidity. Each lender will place a different emphasis on each factor. For example, the largest HML in the country (I don't like to mention names on public forums but it's not hard to tell) used to think that credit scores didn't matter as much, and the average credit scores of their borrowers were in the low to mid 600s. They've since learned their lesson and upped their minimum credit score requirement.
I'll end this by saying... I don't actually/necessarily like to finance brand new investors. We will if they're a strong borrower and the deal looks good (or they came in via a referral), but from a lender's perspective, newer borrowers generally require more time investment, coaching, training, etc. And the closing/conversion rate with newer borrowers is lower too; deals either never materialize or fall out more often. So while new borrowers are wary of hard money lenders, the reverse is also true.
Agree, time is the HMLs friend and the borrower's enemy and time is an absolute beast on newer investors because they have not scheduled a rehab or learned the process yet, one day doesn't seem like it would make a difference but holding costs are high.
Agree, time is the HMLs friend and the borrower's enemy and time is an absolute beast on newer investors because they have not scheduled a rehab or learned the process yet, one day doesn't seem like it would make a difference but holding costs are high.
I'm thinking a newbie who's got to rely on HML in today's market is dead in the water 98% of the time.
I agree 100%.
As a new investor I am not looking at HMLs until I feel more comfortable with the investing and get some experience in the field. I do read about it and starting to get the idea how it works but I don't plan to use this tool until I have few years of experience.
For now I will stick with either cash purchase (then refin cash out) and conventional loans.
I agree 100%.
As a new investor I am not looking at HMLs until I feel more comfortable with the investing and get some experience in the field. I do read about it and starting to get the idea how it works but I don't plan to use this tool until I have few years of experience.
For now I will stick with either cash purchase (then refin cash out) and conventional loans.
Arguably you'll never need this tool as after a few years in the game you should have the cash to fund your deals yourself. I've never used a HML in my career.
@James Wise
That's true. In my opinion, if you don't need to use HML in your investing career then you're doing something right!
Nothing personal, but HMLs look at a deal for 2 things:
1) If they take the prop back will they get their money's worth AND
2) If it is that good a deal, they'll do what they can to force default (like making you do non-urgent repairs ) to see if they can get the property back.
Nothing personal, but HMLs look at a deal for 2 things:
1) If they take the prop back will they get their money's worth AND
2) If it is that good a deal, they'll do what they can to force default (like making you do non-urgent repairs ) to see if they can get the property back.
As they should though. Nothing wrong with them doing that. They need to make money too and default risks must be accounted for.
Didn't say it was wrong and I'm sure totally legal. However, buyer beware when it comes to hard money.
Having talked to over 100 HMLs, personally borrowed from a couple dozen of them myself over the past 5 years for my own investments, brokered for them, and now am a hard money lender... let me offer some different perspectives.
I definitely applaud those who can avoid hard money and afford to buy deals in cash, but that's not a realistic expectation in the coastal markets. I'm from Seattle, where the average price of a home is $700k-$800k. We're still seeing 15+ offers for an ugly unlivable house that's newly listed on the market, and I can tell you the vast majority of those are "cash buyers" who are financing with hard money. We have HMLs that can move pretty fast here and can fund within 48 hours; actually, half of the local HMLs can fund same-day at the auction. Local hard money terms here are about 12% interest and 2-3pts for 6 months. However, there's been a large influx of out-of-state lenders over the past couple years, and you can somewhat easily get a hard money loan, even as a brand new investor, for around 9% and 1.5-2pts these days for a 1-yr loan.
At the same time, I've invested in 8 other states; my cheapest purchase was a $22k property in PA. I know that hard money financing in lower cost markets can be pretty expensive, especially when the loan amount is < $100k. In some parts of the midwest, 15% and 6pts is the norm. Heck, in Brandon Turner's old neck of the woods (i.e. podunk WA), there was only one hard money lender in town and he was charging 10% interest and 10pts. By the way, he's still actively lending in that area; he has no competition doing $50k loans in rural areas.
I'm curious - for those who are saying hard money is insanely expensive, on which end of the spectrum do you fall under? I'm also curious to know what experienced investors are paying; in my experience, getting 8% and 1pt hard money shouldn't be that difficult if you're an experienced investor with strong financials (i.e. credit and liquidity). We've even done loans at better terms than that in the past.
I treat my HMLs as my partners, as an extra set of eyes on my deals. If they're not going to lend on something, it's probably not a good deal, especially if you're a new investor. HMLs do their own comps, maybe their own appraisals, review your budgets/scope of work, and conduct their own inspections on draws (when they fund the rehab) to ensure that the contractor you're paying is actually doing work that adds value to the house. Sometimes they give out referrals to insurance, title/escrow, attorneys, wholesalers, etc. Is it not valuable to have a lender say things like, "Did you know this property was in a flood zone?" or "we're not seeing market rents that high" or "the crime rate in this area is higher than what we're typically comfortable with." As an out-of-state investor who has never seen any of his properties in person, I find these things incredibly valuable, and it has saved my butt plenty of times.
I can't tell you the number of times a new investor has come to me with a bad deal they to finance, and I tell them to walk away from it. It sounds counter-intuitive since I as the lender just lost a loan, but I can tell you that I won a client for life because I looked out for them. Did you know that a lender can always protect themselves, even on a bad deal? It's easy; they just lower their own LTV and make you put in a higher down payment. Even if there's no margin on the deal (i.e. cost to ARV is 90%), they can create margin for themselves and protect themselves using your down payment. Your job as the investor is to align yourself with great partners, which includes working with great lenders who don't choose to do loans that they know will screw over an investor. A lot of those folks are what I call "loan to own" lenders.
I know a lot of investors think, "Why won't you do this loan? The LTVs are insane! I'm buying this thing at half price!" @Steve Morris A good, true lender never wants to take back a property, even at 50% LTV. Do you know why? Because a lender wants to be a lender. They don't want to fix up houses, manage contractors, manage tenants, list properties for sale, etc. They have great processes and efficiencies made for lending, not for owning properties. Every house they take back in foreclosure screws them up, and also gives them a bad rating. That's why what an investor thinks is a good deal does not align with what a lender thinks is a good deal.
True lenders want zero defaults (even if it's not realistic). There are 3 mitigating factors to consider (from the borrower): experience, credit, and liquidity. Each lender will place a different emphasis on each factor. For example, the largest HML in the country (I don't like to mention names on public forums but it's not hard to tell) used to think that credit scores didn't matter as much, and the average credit scores of their borrowers were in the low to mid 600s. They've since learned their lesson and upped their minimum credit score requirement.
I'll end this by saying... I don't actually/necessarily like to finance brand new investors. We will if they're a strong borrower and the deal looks good (or they came in via a referral), but from a lender's perspective, newer borrowers generally require more time investment, coaching, training, etc. And the closing/conversion rate with newer borrowers is lower too; deals either never materialize or fall out more often. So while new borrowers are wary of hard money lenders, the reverse is also true.
@James Wise I love using, and am really grateful for, the hard money lenders I have used. They have helped me grow my business far beyond what I could have grown it without them. I have probably gotten between 70 and 80 hard money loans over the past 4 years and I’ve only had good experience with them. I’ve never had one hard money lender hope that I defaulted on a loan; and sometimes they have waved the renewal fee if I go over the 6 month mark by just a little bit. I can give my preferred hard money lender a call and ask him to fund a property and he can usually help fund 90% of it in a week (sometimes he has done next day funding for me when necessary but he asks for a week).
So I’m not sure why you say they are not a good idea unless it is just to try to protect newbie investors from getting into thinly marginal deals from using expensive money. Then yes, I think it would not be a good idea for them. Hard money is high interest, and if you don’t know what you are doing and you don’t have a good exit strategy, then yes, you may very well get burned. But that wouldn’t be the fault of the hard money lender, you would get burned from the lack of experience and know how.
Thank you James, you have given me an idea for an article or a YouTube video, “How to use hard money wisely.”
@Nghi Le - Thanks for your post, very well said. As a buy-and-hold STR investor I would never have cause to use an HML, at least with our current model...but times and strategies change and I have always been standing against the back wall of discussions like this listening to everyone harp (For lack of a better word), and your post actually changed my stubborn mind a little bit! I can get a glimpse from the lender side after that and can see if sought out and used responsibly it can be a great, profitable relationship on both sides.
Well done!
"A good, true lender never wants to take back a property, even at 50% LTV. Do you know why? Because a lender wants to be a lender."
I don't know about that and most of my HML sad stories were from 2010 vintage. I just got a sense the lenders knew they had a s***-tom of equity and were doing what they could to push the seller into default so they could take it and sell/re-fi it.
I've used HM loans on all my properties I've acquired. You give me 120k, I have 5-6 homes that will cash flow 400-500/month in less than a year (in my market). I get 7% IO for 3 months. I have good relationship with my HM lender and a good crew who can rehab a job in a month. Every deal I've done, I've made over 100% on cap gains and my cash on cash is 20%- 40%. I buy wholesale deals and I can analyze a deal in under 5 minutes, visit the property and be confident enough to drop a 2500 to 5000k non refundable deposit over my phone to the title company. Might not work for everyone, but my success rate with this method is 100% knock on wood.
HM loans work some of the rehab costs into your loan allowing you to come less out of pocket. You're going to refi to a conventional anyway in a month or two. That's where you capture your equity. I just did a deal where I was only 2500 out of pocket for the entire deal after I refinanced. So I spend 2500 to make 45k equity capture and to cash flow 500/month...it's a no-brainer. In 2 years I'll do 1031 exchange so I can avoid paying taxes on my cap gains.