Understanding hard money

6 Replies

New to investing. We have 1 property rented out, and am looking at another. The property we are looking at is in need of work, but can get it for 1/3 of market value. And about another 1/3 of market value to fix up. Thinking of doing hard money loan on it. Want to make sure I understand the whole path.

You get the loan from the hard money lender and than fix it up. If using a hard money lender to buyand fix the property do you hold the title for the property or does the hard money lender? Once you are done fixing up the property to get a conventional loan to pay off the hard money loan, would that be primary mortgage or a second mortage if you own it already?

Hey @Matt Schultz !

Welcome to the community! Understanding hard money can be confusing at first, especially since many hard money lenders do thing differently, but generally speaking, you should always be the one taking title of the property when you close on it. The hard money loan acts as any other loan and is usually only secured by the property, but you are the one and only owner.

As far as financing the rehab as well, look into whether or not your hard money lender requires draws, which can greatly affect the ease of your rehab.

And to answer your question about the mortgage you would get to refinance your property out of the short-term loan and into the long-term loan, that would count as your one and only mortgage and you would use that refinance money to pay off your hard money lender.

Hope this helps!

Colton Cardie

@Matt Schultz Hard money lenders will typically lend up to 70% ARV for someone doing their first flip so it sounds like you should be fine getting full funding for your property if your numbers are accurate. I'm sure they'll want to see some skin in the game so maybe 10% of purchase price as the down payment and they'll loan out 90% on purchase and 100% of rehab. In my experience, I've seen most lenders lend out 100% of rehab.

They will typically hold the rehab budget in escrow and will want to see work completed before releasing funds.  For example: they will likely provide line items for all parts of the house that need work.  As you complete the line item, you will request a draw, they will send someone out to ensure the work was completed, then release the funds for the completed line-items to you.

When the property is done, you simply go to a lender and ask for a refi loan into a 30 year mortgage.  The new mortgage will pay off the hard money loan (allowing you to sleep at night) and you'll now have an investment property with a good bit of equity :)

We just had a kid we mentor get a USAA Investment loan (duplex) priced @ $20k (private sale). 7yr term, 16% & we thought our 12% was high.

Originally posted by @Janina S. :

@Spencer Cornelia which lenders have you worked with? I'm in the Chicago land area and this seems like the route I want/ need to go.

I'm also in Chicagoland and can probably make a suggestion for you. You are also welcome to come to our office and discuss your plans over a cup of tea. :)