Pros/cons of conventional vs hard money?

Question

What are some of the pros and cons of going with hard money / private lending vs conventional for a second home/ investment, rental  property??

Nathan Gesner · Answer

Hard money lenders typically charge a much higher interest rate and are better suited for short-term loans. An example would be borrowing $200,000 at 12% interest then using the money to purchase a $120,000 home, spending $80,000 on renovations, and selling the house for $260,000 and making a $60,000 profit.

You could also use a hard-money lender and pay the higher rate just because you can't qualify with a traditional lender. After a year of ownership, you could qualify with a traditional lender, refinance, and bring the interest rate back down.

Michael Kinsella · Answer

@Chris Klingemann,

There are, as you might expect, pros and cons to using a private lender as opposed to a bank to finance your projects.

Pros;

1. Faster capital. Private lenders are generally much more nimble and have a faster approval process than banks.

2. Fewer docs. Private lenders generally require less documentation than banks, and some private lenders don't even require a full appraisal (more often the case with private lenders that are very familiar with the location of the subject property, and can perform adequate in-house underwriting).

3. Fast construction draws. The construction draw process for many private lenders is faster than with banks, because they are set up to finance real estate investors/fix and flippers such as yourself. This means that you get your funds faster, because most rehab lenders fund on a reimbursement basis, or once the work is completed and inspected.

4. Less strict borrower standards. If there is a gap in your profile, e.g. a low credit score, there are private lenders that can work around this. You would be hard-pressed to find the same flexibility with a bank.

Cons;

1. More expensive capital. The interest rates and points you can expect to pay are typically going to be higher than with a bank. You can expect to pay high single digits to low double digits in interest rate, and at least a few origination points.

2. Less scrutiny. There is generally less oversight/regulation with private lenders than exists with banks. As a result of this, it makes sense to spend more time understanding the lender that you are working with, and probably get some good recommendations from other investors or real estate professionals that you trust.

Best,

Michael

Jonathan Bombaci · Answer

To @Nathan G.’s point hard money is Expensive but there are times to use it. Here are typical HML and conventional investors loans that we see in the greater Boston.

Conventional: 25-30% down payment, 0% on rehab budget. Property must appraised at or above purchase price. Typically we’re seeing 3.5% - 4.0% interest fixed for 5 years, 15 year loan amortized over 25 years. You’re personally guaranteeing this so your credit score and DTI ratio come into play during underwriting.

Hard Money Loan: 11-20% down, 100% of rehab budget. Property must appraise 25-30% over the total acquisition price (cost + rehab). Typically we’re seeing 10-12% Interest Only loans + 1-2 points and they want to be exited in 12-24 months. Most of these are not personally guaranteed so your credit score and DTI ratio, while looked at, won’t in themselves black list you from the loan. Be advised the HML will take the property, quickly, if you fail to make payments. They typically will not lend on owner occupied properties and many won’t touch properties with tenants in place.

Most of the time the property either works conventionally or with hard money. There aren’t many cases where you can choose which product to use and have them both make sense. In the scenarios where you can use either there is almost always a clear winner once you run the numbers and consider the capital outlay.

I hope this helps,

Best,

Jon

Pros/cons of conventional vs hard money?

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