QUESTION: I keep hearing about using hard money to help fund projects when you aren't able to get a conventional loan. Looking into it, I see most hard money lenders will only lend to LLC's or other corporations, and not to individuals. Is it possible to get a hard money loan as an individual? Would it be better to get private money, or is that the same thing? Would it be reasonable to start an LLC before making your first deal? Anyone with some knowledge in this area would be greatly appreciated!
Private money and hard money are two different things. For both, most of the time you need an entity, this is because in order to lend to an individual you have to have an NMLS #. There are some who can do it with out but an LLC will open the doors up to way more options. It only takes a week or two to get an entity set up. Hard money is more fit in a box - cash - credit - experience and you will find little difference between lenders because most hard money notes end up getting sold to hedge funds. The hedge funds will only buy the notes if the notes meet their guidelines! Private money will have less hard guidelines but will have higher interest rates and will in general be more expensive. Both options have pros and cons, I would call some lenders and get a feel for what the market has to offer!
Matthew, thanks for the response! Definitely seems like starting an entity before making an investment could be highly beneficial to my situation. I look forward to reaching out and learning more. Thank you for your time!
@Jacob Claxton from a liability standpoint, it's most likely best for a real estate investor to invest through an entity. It provides a bit of protection. Most HML will require this as well. Private loans aren't the same thing as hard money loans. Private loans are usually a bit more attractive but difficult to get unless you have experience or someone in your network willing to lend to you. You can form an LLC as you go through the underwriting process for a hard money loan.
George, Thanks for reaching out! I appreciate the help.
Debt Service Coverage Loans can be made under and LLC or to private investors. Rates are better than HML or PML, typically.
If DSCR doesn't fit your goals, then HML/PML would be good alternatives.
Get deals before getting an LLC. You can also get a LLC once you have a property under agreement. I have properties under my personal name and under an LLC. But to get started that's the last thing I would worry about. Hard money lenders will lend on good deals. The ones I've worked with don't care if it's an LLC or not. They will have you guarantee the loan personally most likely.
To add to what Matthew said, setting up an LLC is simple and NOT expensive at all. Private/Hard money lenders will typically only make loans to a business entity (LLC). They are referred to as Special Purpose Business Loans and they are made used for investor properties (fix and flip, new construction, rental, AirBnb) Hope that helps!
What do people usually do if they are BRRRRing a property and use a hard money lender which requires a LLC. Where do they get the financing when they are trying to do the cash-out Refi part? Will they have to go to a portfolio lender because it's in a LLC? Any insight would be great appreciated.