Hard Money Lenders - Worth it?

Question

I've just started learning about hard money lenders. I can see the draw, especially since it isn't so much based on your individual credit as it is on the property. My question is to the ones who have used this financing strategy.  Is it worth it? How do you make any positive cash flow if the interest rate is so high? What is a realistic goal in being able to purchase a property with hard money, do the rehab work, and get it cash flowing enough to refinance the loan to get a better interest rate? I know that's a ton of questions. I appreciate y'all's help.

Dennis Anninos · Answer

The term "Hard Money" was coined many years ago. It is still being used today. However the funding today does not come near what used to be considered "Hard Money" (12%-18% interest, 4 to 6 points). Today the term "Investor Lending" really is more appropriate. Many lenders in the space have one set of guidelines for how they lend. However not every deal is truly the same. So the best lenders are ones with several programs available which address the potential hurdles in each transaction. I would contact a few and see who you feel comfortable with. This way you can see who is willing to invest there time into you to develop a relationship. A relationship that hopefully will be prosperous for both of you.

Stephanie P. · Answer

It's all math and access.

As long as there is enough of a spread between the purchase and rehab number with closing costs and the final sale number with closing costs, most people think it's worth it.  It's incumbent on the investor to know their numbers, know their tolerance for mistakes and know when to walk away.  I'm seeing rates in the 9-12% range with 3-4 points for hard money.  Most of the time the loan to value is between 80 and 90% with 100% of the rehab covered.

The barrier to entry for a non owner occupied property that needs renovation is often too high for the ordinary investor to overcome.  Most folks don't have the cash to get the job done.  If you have a lender that will foot the cost of the rehab, that gives you access to more properties.

It really is the investor's job to factor all of those variables into the equation if they want to scale their business.

Ruchik Gandhi · Answer

@William Kilburn

When it comes to Hard Money, not all loans are high interest. The ones which tend to be high interest rates are the short term loans which includes rehab financing, etc. There are a lot of conventional loan options which are fairly competitive to bank rates provided certain conditions are met.

William Kilburn · Answer

Thanks @Tim Johnson.  After reading several more articles I think I'm understanding hard money a little bit better.  I agree with you it would be a better deal if I could find lower-rate programs.  I'm just starting out and am looking at creative financing methods.  Thanks for your time in helping me out!

Tim Johnson · Answer

Hard money is short term- 6-12 months, then refi out.  They have programs that will do the same thing, with better rates,  I would suggest talking to a local broker