Under what circumstances would a hard money loan make sense?

Question

In what circumstances would you consider a hard money loan a good option or a good idea?

Ned Carey · Answer

Basically when 2 criteria are met.

1) you can't get cheaper money

2) the deal will  make you a lot of money anyway, even though you are paying higher rates.

It always amazes me that people will happily do a 50/50 partnership and give away half of the profits but don't want to pay 15% hard money rates because they feel it is too expensinve.

Travis Timmons · Answer

It's a short term debt instrument. Situations like a flip, BRRRR, using it to pay cash on a property that does not qualify for conventional financing (to BRRRR or flip ideally), or to bridge a gap to seize an opportunity if you know if you have money coming in a few months (from the sale of another property or something like that).

It's a great tool, but you need to know how you are paying it back before you take hard money.

Caroline Gerardo · Answer

1. You are 100% certain you can complete and sell in 12 months and adding in carry costs you still are making 20% return on your work (including a salary for yourself in the total costs).

2. Seller needs to close in 7 days and the subject is discounted 25% of market price. You have the money and team to rehab it in 12 months to sell, or you already qualified for a full doc cash out refinance in writing from an Underwriter for a longer hold. With the refinance you must stay on your w-2 job and keep your credit better than what you qualified for

NEVER good if your financial situation leaves you with no exit options. Never good if conventional lenders won't loan on subject because of structural problem you can't quick fix/ or location is in the C - D range (you can't change location) / or you have liens/credit ghosts that can tie up selling or refinancing.

Aarielle Pannesi · Answer

Perfectly explained. very grateful for the information

Erik Estrada · Answer

Here are 3 scenarios where hard money can make sense:

1. Purchasing a property that needs significant work and will be used as a rental or flip. Most conventional lenders will not lend on a property that is uninhabitable

2. Cross collateralizing other investment properties so you can buy with little of your own cash.

3. In markets where conventional lending is tight and the deal is very good.

Matt Villanti · Answer

Good Morning Aarielle,

All of these responses have been great, another reason for using Hard Money would be if the person in question does have stellar credit.  Some HML will use past experience and cash reserves in place of a credit score.  FlipCo Financial will not pull credit to underwrite a loan.

Ethan Gidcumb · Answer

Hey Aarielle! Most people turn to hard money if they have trouble being qualified with a bank, (such as showing income, etc.), if the property is not bankable, or if they need a quick closing time. Its a great option if you are only concerned with being approved for an investment property but it's crucial that you have an exit strategy, (to get out of the hard money loan), and that you are prepared for the additional costs you will face with the increased rates.

Eliott Elias · Answer

When the property needs a lot of work to bring up to ARV and is un lendable due to its condition.

Mike Klarman · Answer

So, if you have a property where the purchase + rehab is less than 70% ARV then it makes total sense.  You'll get 80% - 90% of the purchase price plus 100% of rehab funds in a loan.  You'll pay the carrying costs and then when you sell of refi you payoff the bridge loan and then pocket the profits.

Kayleen Hammerschmidt · Answer

Hi Aarielle!

HML is a good option for example if you have an opportunity to purchase a investment property that you know you can flip and sell quick with great margins and pay back HML within short term contract. You can use the value of the home as collateral. Its only a good option if the bottom line is greater than the expense to use it.

There are many opportunities HML could come in handy, but while hard money loans offer numerous benefits, they are not without drawbacks. The primary disadvantage associated with such loans is their higher cost of borrowing compared to traditional banks. Due to the increased expenses associated with hard money lenders, borrowers will encounter elevated interest rates.

Under what circumstances would a hard money loan make sense?

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