Private lenders vs. local bank?

Question

What is the benefit of using hard money lenders when the interest rates are so high? If I have the capital just go to my bank I bank with correct?

Joe Splitrock · Answer

@Matt Sora most people responding are basically saying the same thing. A hard money lender is for when bank financing is not possible. Banks will have more stringent lending requirements and are less likely to accommodate strange lending situations. Hard money lenders are more flexible but also charge more. Lending is a risk based business, so anything that increases risk will increase costs.

Seth Young · Answer

Private lending rates may be a little higher but you may not need to provide a w2. They do not need the typically w2 income to lend.

Katherine Blazer · Answer

I agree with @Jeff Copeland

Yes, hard money loans have higher interest rates, but if you can do multiple deals because you put less capital into each one, most people make more money. You should also talk to your attorney about asset protection benefits when using leverage.

For longer-term rentals, the same applies. Less cash in each property means you can do more deals. Your cash flow may go down, but you should be able to purchase multiple properties. Talk to your accountant about ways to use depreciation and interest payments to help you with your taxes.

Mike Davis · Answer

@Jeff Copeland and @Katherine Blazer make great points, another is that you get your properties in an LLC and keep the mortgages from reporting on your personal credit. HMLs have other programs than just short term loans, your short term loan can be rolled into a longer term. The more projects you complete and the stronger your overall packet is the better terms you will get.

Jeff Copeland · Answer

It depends. Sometimes you just have to use the right tool for the right job.

You're correct that you wouldn't use hard money on a turnkey asset.

Hard money is the right tool to use when you need short term debt to acquire a distressed property that needs a substantial amount of work - a flip or a BRRRR (which is not an asset that conventional/local bank type lenders will have an appetite for).

I'll PM you a case study on this (they don't like external links on the firms).

Eliott Elias · Answer

Bank's will not lend on a property that is "uninhabitable", hard money lenders will.

Hard money is a lot more accessible as well, banks could take months to finally approve your loan and fund you. Hard money is fairly quick.

Andrew Bang · Answer

Don't look at HML's interest rate by itself, look at it from a total cost, because you'll only need a HML for a few months. I'll give an example below,  but hard money is as close to a cash offer as you can get and still be a loan.   A true direct (balance sheet) hard money lender just takes one day to put everything together, no credit check, no employment verification, no tax returns request,  Its all about the property,  a hard money loan is an Asset based loan.   typical example:

Investor buys a property for 500k, and it needs 50k in rehab.   Using a hard money loan their total cash to close is 60k.  HML covers the rest of the purchase price and all the rehab.  Investor fixes up the property and sells for $660k (75% LTV) .   About 20k went to the HML for costs/interest.  After all costs investor walks away with 45k.  Investor made 45k on 60k in 4 months,  that's 75% ROI in 4 months, 225% return annualized.   If they had the cash and used it would have been 65k return on 550k, or a 11.8% ROI, 47% annualized.

Rob Beeman · Answer

@Matt Sora  Sometimes it is best to mix it up - use both resources. Match the project up with the money source. Each offer pros, and each have cons as well, but for me, I migrated away from banks mostly because I didn't like being restricted and when the market turned the wrong way, they forgot who I was (they loved me when the market was strong and ignored me when the market got soft).

Private lenders vs. local bank?

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