How does hard money work?

Question

My strategy is to start a rental property empire by doing the BRRRR strategy.

So I have been doing some research about private financing and had a few questions about hard money lending.

I know typically hard money is like any loan and they usually charge about 10-15% interest. However, I really don’t understand the points behind the loan itself.

Also, when talking to a conversation bank about refinancing they said you would have to hold any money given to you up to 2 months or that lender would have to be on the dead. Is this correct with any private lending you get?

Andrew Postell · Answer

@Hudson Walker always great to meet a fellow Texan on Bigger Pockets.  The term "points" is a fee that is essentially a percentage of the loan amount.  To make math easy, if your loan amount was $100,000 then 1 "point" = 1% so your fee would be $1,000.  Each point is 1% of the loan amount.  0.75 in points = 0.75% and so forth.  I hope that makes sense how I am describing it.

Now as far as that "conversation" you had with a bank....that sounds like you spoke with a larger bank.  As investors we should not work with any lenders that have that sort of a rule with lending.  We need flexible lending which means, in general, smaller banks.  I created a small list of questions for people to ask their lender when interviewing them.  Here's the list:

Questions for Lenders

• When do you start using rental income to help me qualify? (the      answer needs to be immediately)
• How long do you need me to be on title to refinance? (this is      important if you do need a short term loan to purchase then refinance out      - and the answer should be 1 day...very important that it is 1 day on      title is all that is needed to refinance)
• What is my minimum down payment required? (if they only require 15%      down on a single family home that is usually a good sign that you are      working with a flexible lender)
• Can I change title to my LLC?
• Do you sell your mortgages?
• What is your loan minimum?
• Can you explain to me what your reserve requirements are?

Hope that helps!  Thanks!

Matt Hurley · Answer

Hard money lender gives you a percentage of the purchasing price then covers some of all of the repairs.

For example, I just made an offer on a house that was $80k that needed $25k in repairs. The hard money lender transferred $68k into an escrow account (he covered 85% of purchase price), I provided $12k of my own money. The full $80k would then be transferred to the owner in cash.

A lot of HM lenders give the repair financing in draws. Meaning, you complete a line item repair (new kitchen, roof etc.), pay the contractor, then get reimbursed by the HM lender. Also meaning that you still need a little bit of cash cushion. Some HM lenders just give you the whole amount up front, depends on the person.

Points are the percentage fee the lender charges. I.e. HM lenders puts in a total of $100k and charges 2.5 points, you pay them $2,500 up front as a service fee.

Over the course of the loan you will often pay “interest only”, where you pay no principal and just the interest over the period. Many HM loans are 9-15 months max, after which you are required to pay back 100% of the  total loan amount.

Overall, it’s a good option for the right deal. Your buyer would get “cash” but you incur a whole lot of more fees, so the price has to be right!

Hudson Walker · Answer

@Matt Hurley thanks for the feedback. That breaks down the fees and the bottom line of finance that is expected.

Hudson Walker · Answer

@Andrew Postell. Also nice to meet a fellow Texan.  Thank you very much for the clarification. That really helps me understand the process and what to expect. I also notice you are a lender as well.