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Questions About Hard Money Loans
Hey guys! My name is Ben Morand and I am a 20 year old college student interested in buy & hold investing. Over the past few weeks, I’ve been working on analyzing a ton of deals, hoping to find one that meets my criteria.
My main issue is that as a college student, I don’t have a whole lot of money to put down, nor a steady income source. Because of this, I have been drawn to hard money as a way to initially fund my first deal.
I have read Brandon Turner’s book on Investing in Real Estate with No (and Low) Money Down and feel pretty confident with several different methods of creative financing. However, if anyone is willing to help me out, I have a few questions left about hard money loans.
1) How are these loans generally structured? I know they tend to be shorter payback periods (ex. 5 years instead of 15-30 years). However, with this, are they generally more so balloon payments or traditional monthly payments? It seems as if, with such a high interest rate and short payback period, these loans would be astronomically high payments if not structured right.
2) How long does one generally have to hold a hard money loan before they can refinance to a traditional 30 year fixed rate? I know you need substantial equity in a property, so this number will vary from person to person, but generally, will it have to take 6 months to a year, similar to an FHA to conventional refinance, or can the refinance take place within a few months?
3) How likely is it that a hard money lender would fund the entire purchase? With this, do they often require some sort of collateral to compensate for the risk that they are taking?
4) When refinancing into a conventional loan, do the banks require additional income beyond the rental income in order to meet the income requirements (even if I am cash flowing positively with my property)? I have no other debt, so my DTI would be solely based on my rental property.
Thank you in advance to everyone that is willing to help! I know some of these questions might seem a bit naive, but I am just trying to understand this process a little better so that I can strategize how I will finance my first rental property. I am sooo hungry to get started in this industry so I want to learn all I can and apply it as soon as possible.
Thanks everyone!
@Ben Morand
Generally, the loans I believe are intended to last no more than a year. Once you’ve fixed up the place, it’s intended that you refi into some sort of conventional loan or sell the property. In either case, the hml gets their money back and in the former they get to originate another loan and make a few more bucks.
It’s pretty rare for a hml to fund 100% of the acquisition cost, especially to a newbie. You need to have some “skin in the game” otherwise what’s to stop you from walking away from the deal once you realize either you don’t know what you are doing , over your head, or perhaps a just plain unreliable.
Plus, after the acquisition there is the reno cost. Usually they will loan a majority percentage of each, say ~80%. But, they don’t handle your cash flow. So, you need to have cash on hand (or some other credit line) to cover the reno costs before you can make a draw with them to get cash for the reno. Basically, they aren’t going to front you the cash.
So, other than all the stories/sales pitches/ideas that you can do flips/fixer uppers without any cash.... it’s really hard. Plan to cover day 30% of the acquisition (don’t forget closing costs). Also, theb”legitimately feeling” hml that I’ve spoken with charge 2 points on the loan. Other day they don’t, but they never seemed trustworthy... Depending on the nature of the reno, a payment/draw plan will be scheduled into the loan. Face it.. if it’s a $20k reno, it’s going to be one draw probably. If it’s something larger that can have some sort of real milestones, then ther is something to work with.
Don’t forget to plan on having cash for unforeseen “stuff.”
I hope this helps. Really, you should just talk with hml (look on the professional section of BP) or network your area. It will need to be somebody local. You need to realize that they will know the market better than you; they need to protect their investment. If you try to sell them a $600k deal in $500k neighborhood they will know right away you are crazy.
Also, hml usually have GC’s to recommend or team with you. Again, they want to make sure you succeed or else how do they get their money...
Good luck.
Hey Ben,
I currently work with and learn from a Hard Money Lender in the Virginia beach area. Based on the questions you are asking I think you are mixing up hard money and private money. Private money is anyone with their own money that they want to lend to you for a higher return then they would get from a bank account. The terms of these loans are usually 5%-10% and the lender does not need to have any experience with real estate. For example I use my grandfather as a private money lender and just give him a first lien position, just like i would a bank. This is something you could use to leverage a down payment and just pay that back over lets say a 5 year term but that is up to the private money lender. They are usually a lot easier to negotiate with. A hard money lender is usually someone who has done flips or BRRRRs before and really knows the business. Their terms are usually 10%-15% and do not typically go past a year. My HML for example only lends out up to 6 months and then the interest rate doubles. That is definitely a situation you do not want to be in. I would recommend getting an experienced agent and a contractor you really trust before moving forward with hard money. You should also have some cash saved up to mitigate risk if things go bad. But to answer some of your questions.
1. Hard money loans are generally structured by them taking a primary lien on the property for a 2-12 month term, You will be required to pay interest on your loan amount either monthly or at the end when you either decide to sell or refinance out of it. This is where Hard money and Private money are different because they all play into different strategies.
2. Hard money is typically only used for properties you are trying to rehab because the goal is to increase equity so that you can make money when you cash out. (Sell,Refinance) Hard money is not going to be used for a property that is already move in ready because there is typically not enough added equity to cover the high interest rate. If you plan to use private money to fund the down payment so you can get a traditional loan that is a strategy you can look into.
3. Hard money lender will only fund the entire purchase and repair budget if it is less then 75% of the ARV (After Repair Value). This is insurance for the lender because he can ensure you make enough money to cover the interest while also making a profit. It is important to note that a hard money lender is on your team. Like David said he wants you to be successful so that you can come back and do more deals with him.
4. The refinance is the most overlooked portion of the BRRRR in my opinion. You want to make sure that the bank will actually approve you for a traditional loan. They also will only cash out 70%-80% loan to value because they need some equity. Think of it as a traditional mortgage. Most of the time you need a down payment to pay into that mortgage. Well when you need to refinance instead of you putting money down they simply just give you less money. That is another thing to budget for as if your calculations are off you might not get all your cash back.
Based on your post it sounds like you need to do some more research and assemble a good team before you get into hard money. I would start by trying to buy your first primary residence or first rental and just feel everything out. I am not saying do not take action, just work your way up to it. I am 23 years old so I know exactly how it feels to be excited. I would love to connect and share some stories about my first couple deals.
@David M. Thank you so much David! That was great information!!
@Cameron Rockwell Cameron, I will definitely connect. I would love to hear stories of your first few deals. I have found it a bit hard to find someone in a situation similar to myself, so it is nice to hear of someone doing it at your age. I’ll shoot you a PM right now, thanks!
@Ben Morand first off this is not meant as an insult, but I think you're at such an introductory stage with hard money research you'd benefit from talking to someone on the phone rather than online. If you're interested I'd be happy to talk and give you a rough idea of what hard money looks like. You can also get a lot of intro info by setting keyword alerts to hard money and reading through the alerts you get. If you'd looking more at private money @Cameron Rockwell covers the difference above well. Hard money is a great tool to have in your toolbox, but you do want to know as much as you can about it before getting into it.
@Odie Ayaga Thank you so much Odie! I definitely will do a ton more research on it. Right now, I am trying to learn the various ways of creative financing and find something that would work well for my particular situation. I originally thought that hard money would suit my situation well, but after reading everyone's insights, I now understand that there is a lot more to it than I thought. I will probably also write some posts about seller financing and FHA 203k loans in the next few hours. I'll definitely connect, however, and shoot you a PM as well. I appreciate your help!
@Cameron Rockwell Great breakdown man!
@Cameron Rockwell your explanation is flawless!! You must have the inside scoop and also a great mentor 🤑.
#homeportcapital
@Joshua Benjamins Thanks! Yeah I’d say I have one of the best mentors out there!
#homeportcapital
Thanks Cameron Rockwell
Great breakdown. The refi part is also an intrigue part of the Brrr process. Any recommendations on getting any loans. I do not want to max out my 10 fannie and freedie loans at the moment. I will also like to close in my llc once i refi. Would you recommend credit unions and community banks for non conforming loans that has no limit on there loans. Im curious i would like to scale my portfolio. I noticed the Brrr process does not work well with the big banks after 7 or 8 mgts. If possible i would like to connect i would love to hear your stories on past deals and how you use Hard money and your exit strategies.
Thank you for any feedback
warm regards
Naquan
warm regards
Naquan
@Naquan Kornegay I typically would only look to small local banks once you get into that 5-10 unit range. They are a lot more flexible to work with you, as big banks try to shy away from mortgages 5-10. I would get a list from an agent in your area and just start calling I'm sure one would be willing to refinance. Just make sure you get a letter from them saying that they will refinance I have heard a lot of stories where people can't get the refinance portion of the home done and they need to wait until the tenants lease is up before they can sell. Another good strategy is to just put it in your spouses name as she can have up to ten loans as well. I know you mentioned an LLC so I don't know what your asset protection looks like but you can speak with your attorney about scaling and see what strategies you can utilize to scale and protect yourself at the same time. Feel free to reach out to me if you have any questions. Best of Luck!
