Why do people use hard money lender?

Rental Property Investor · New York, NY · Member since 2020 · 11 posts · 2 votes

Fairly basic question, but want to understand a few of reasons. Are people just using them to purchase cash only properties? Or are you they using them because the bank won't lend to them? What's the typical LTV on a hard money loan (ballpark as I know it's case specific)

If it is a cash only property do people use hard money and then refinance with traditional financing after rehabbed and stabilized?

Lastly, people mention that hard money lenders only finance people with a track record. How do you show your track record? Do you need an LLC?

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Ellis San Jose

Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes

Hard money is used because it is usually a much faster process & also can be used with properties that in the current condition won't qualify for traditional loans.

65%-75% of ARV is the typical range but it varies lender to lender.

Flippers will use hard money to acquire the property & fix it up to resell.
Holders will use hard money to acquire quickly then switch to bank financing to keep it for a rental.

There are so many different hard money lenders and guidelines. Some will lend if they feel there is enough protection for their capital regardless of your experience. They may watch the release of funds more closely for oversight.

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Ellis San Jose
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
6y
Hard money is used because it is usually a much faster process & also can be used with properties that in the current condition won't qualify for traditional loans.

65%-75% of ARV is the typical range but it varies lender to lender.

Flippers will use hard money to acquire the property & fix it up to resell.
Holders will use hard money to acquire quickly then switch to bank financing to keep it for a rental.

There are so many different hard money lenders and guidelines. Some will lend if they feel there is enough protection for their capital regardless of your experience. They may watch the release of funds more closely for oversight.
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Odie Ayaga
Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
6y
The most typical reason is because a property needs rehab before being able to refi and a conventional lender won't lend on. Some people use them for speed some use them because it's less hassle typically than a bank. Every hard money lender I know will lend to a first time borrower and hard money is not cash. I'm not sure where those notions started popping up. Anything you have to qualify for is not cash.
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Mark Sewell
Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
6y
It is partly about the property being in rough condition and it is also the requirement for quick close.
I have done only one flip, and I used a local HM lender, so there you go. They finance newbies.

Most now offer a range of products, including temp to perm loans - great for folks that want to use the BRRRR strategy. It isn't just for flippers.
And this leads me to my point.

These guys cost more, but they are also a free mentor/coach as well, at least prior to and during your project. I see so many that are super concerned about the cost of using HM but yet these people are more than willing to shell out $5K for some coach or mentor somewhere. That coach/mentor is happy to take your cash, but they are not participating in any deal along with you. Once you pay them, they deliver their 'value' and then they are out.

Your HM lender is right there with you in the trenches - it IS their money that is at risk in your deal. You are both rowing in the same direction, you are both very interested, materially, in the achieving the same outcome.

* They are going to do what they can to steer you (and their money) away from bad deals.
* They are going to tell you what's up - candidly. They don't mind calling your baby ugly.
* They have a lot of contacts to share with you.
* They have a lot of insights to share with you.
* They know your market a lot better (important here to find a local HM lender)

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Whitney HuttenPro Member
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Michael Y. I like hard money lending as I get to use "other people's money" to invest in projects and create velocity with my own money. HM can close like cash (fairly quickly) but it is not cash. The more you do with a lender the better the terms will get as well. I also like it because I can do a rate and term refinance right after the rehab and not have to wait for seasoning requirements. The HML will also underwrite the project (you can't have too many eyes on the deal!) and do an "as-is" and post-rehab appraisal so I know what I'm generally in for. The key to scaling is learning how to use other people's money :)
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Michael Y.
OP
Rental Property Investor · New York, NY · Member since 2020 · 11 posts · 2 votes
6y
@Whitney Hutten Appreciate the response, and that actually is a great jumping point to my next question. Obviously someone would like to refi our the HM given higher cost of capital. If their any risk that traditional financing will deny the deal again after your rehab?
Also, can you elaborate on on your sentence below. Why don't you need to wait for the property to season?

"I also like it because I can do a rate and term refinance right after the rehab and not have to wait for seasoning requirements."

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Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
6y
@Michael Y., as you mentioned and can see here, lots of reasons. I have only used for Fix&Flips, and it was because we didn't have the cash to do the project without financing. And we needed a cash close/quick close to get the deal.
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Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
6y
Hard money is used by flippers and in some cases in 1-4 units that needs a major rehab and is vacant. Quick, easy way to get Money.
You posted on a multifamily forum. The bridge loan is what is used in MF for properties that are not fully stabilized (under 85% economic occupancy). These are short term 1-3 year loans, interest only between 5-8% interest. Usually they lend on the purchase price plus renovation.
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Whitney HuttenPro Member
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Michael Y. Here is a guide to how to survive the BRRRR refi. Just to note, you should know your numbers with reasonable certainty prior to purchase.
On a conventional rate and term refinance, you are swapping the loan and not cashing out... so you don't have to wait for seasoning. And for most commercial products, seasoning requirements can be short.
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Michael Y.
OP
Rental Property Investor · New York, NY · Member since 2020 · 11 posts · 2 votes
6y
@Whitney Hutten Very Helpful!
Just thinking outside the box, and let me know if this works. Could you potential use a hard money lender for the acquisition, do a conventional rate and term refinance rate after the rehab, then after it is seasoned 6/7months do another refi do pull out some equity.
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Odie Ayaga
Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
6y
@Michael Y. I don't see that being profitable. Spending thousands in closing costs to save a few percentage points over the course of a few months?
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Coral Hernandez
Lender · Member since 2020 · 126 posts · 77 votes
6y
Hard money: “The Pro’s and Con’s”

Pro
- All CASH Transaction
- Quick Closing Times (<14days)
- All “Rehab Cost” are covered in Loan
- Lower Leverage for Buyer and more Liquidity
- Flexibility to buy Distressed and Value-Add Properties
- Loan based on Property and underwritten so Borrower is Profitable
- Does not show up on Credit Report
- No "DTI" (Debit to Income Ratio)
CON
- Higher interest rate than Bank
- Shorter Repayment Schedule (<12 months)
- More conservative evaluation of the Property’s Value
- Not doing your research and working with a “Bait and Switch” Lender (check out our post on this)
    Real Estate is one of the most dependable and powerful ways to grow your wealth. Shake off the Stigma of what you might think a Hard Money Loan is, and do your research.

     How successful do you want to become? The FNMA (Federal National Mortgage Association, aka Fannie Mae) only allows up to 10 mortgages.

     So, what are you going to do, stop growing your Empire? No. You’re going to seek out alternative financing and lending. And that is where your Hard Money Journey will begin, if not sooner.

    Learning how to use O.P.M. ( Other People’s Money ) is imperative to becoming a Savvy and Successful Real Estate Investor...
1 Reply
Ellis San Jose
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
6y
Originally posted by @Odie Ayaga:
@Michael Y. I don't see that being profitable. Spending thousands in closing costs to save a few percentage points over the course of a few months?

Hard money is about closing a profitable deal quickly not interest rate. If you had a deal that had $100,000 net profit, how much would you be willing to pay in points & interest in order to beat out the competition?

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Odie Ayaga
Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
6y
@Ellis San Jose I'm not sure if that question was directed at me or the OP. If it was directed to me I don't think you read it in the context of the conversation since it was in response to his last question. As a hard money loan officer I'm well versed in the benefits of hard money.
0 Reply
Colby Fryar
Investor · Tucson, AZ · Member since 2017 · 394 posts · 178 votes
6y
@Whitney Hutten do you have any concerns going forward using hard money with respect to recent stock market declines and potential weakening of the economy. My question is how will someone be able to refi out of a hard money loan if the market values start dropping? Will the banks begin to slow or even cease refinances? If you could, please share your experience with this.
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Whitney HuttenPro Member
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Colby Fryar That is a great question for lender. I would imagine it might become harder for a conventional refinance... but if the deal is great and the borrow it stable, the bank will lend. Commercially, I think the same thing applies. The Fed rate cut is to stimulate banks to lend to businesses for the most part... As the investor, you are the business.
Also, tons of money has flooded the stock market. I would imagine private lenders will have more to lend as well... if the deal is great, the business plan solid, and borrower stable... you have much in your favor.
Personally, I would keep projects on shorter timelines to help mitigate an market risk...
Podcast Guest on Show How to Build Generational Wealth Without Losing it Along the Way
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Whitney HuttenPro Member
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Michael Y. I agree with Odie... I'm not sure two refis make sense as each will have additional closing costs that have to be factored in. Here is another guide on how to use financing on a BRRRR (you can mix and match the strategies). Hard money can move quickly and close like cash. I really haven't had that much issue competing with cash if I have my lenders lined up and make a strong offer. Sometimes I can win because I can come in slightly higher on the purchase because I'm using leverage. Of course that is market dependent.
Podcast Guest on Show How to Build Generational Wealth Without Losing it Along the Way
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Colby Fryar
Investor · Tucson, AZ · Member since 2017 · 394 posts · 178 votes
6y
@Whitney Hutten Thank you!
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Hamid Sedaghat
Lender · Raleigh, NC · Member since 2019 · 36 posts · 19 votes
6y
In addition to the points made regarding quick closes, ability to leverage to complete more projects, and acquire financing when banks will not offer it, from my experience good Hard Money can streamline and scale your process as an investor. If you can rely on your Hard Money Lender understanding your business and needs, and deliver consistent, fast closings it will make scaling much easier. Much like having good contractors, wholesalers, real estate agents, and other professionals in the industry, and Hard Money Lender who you have a good working relationship with can go a long way (and it should drive costs down the more you work with us)!
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Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
6y
Originally posted by @Account Closed:
Hard money should be avoided at all costs if you are a beginner.

I would respectfully disagree. If you have a deal and numbers work and you don't qualify for conventional financing for one reason or another (and there are many), then a hard money deal may make sense. It's certainly not the primary "go to" type loan, but it's all about the numbers. If it works, it works.
Stephanie

2 Reply
Coral Hernandez
Lender · Member since 2020 · 126 posts · 77 votes
6y
@Stephanie P.
We agree. If you can leverage other people's money and come out ahead, that's the way you grow and expand.
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Why do people use hard money lender?

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Hard money: “The Pro’s and Con’s”

Pro

CON