Hard Money loans are they ok?

Question

I have a partner who is willing to do a hard money loan for me...Are hard money loans ok to do when you first start out in real estate?

Kortez

Tapan Trivedi · Answer

Where is the construction money coming from and how much is it ? Are they putting it in an escrow and charging you inspection fees for the draw ? The 2k fees that you are mentioning are they loan origination fees and do they also include points ?

The good part is that you are getting a small loan and it seems like 100% of purchase price. Also the lender is working with someone fairly new. That is good.

But if you are calling him a partner - are we to assume that there is an equity split too ?

Tapan Trivedi

Joe Butcher · Answer

Hard money can be great! But....what are the details of the loan? Interest? Points? Time frame?

Is this a fix and flip? Rehab for a rental that will be refi'd into a conventional?

You tend to get better answers here when you give a lot of details, I'm sure others will chime in once you do.

Anthony Dadlani · Answer

On properties that need work, usually a hard money or private lender is the only choice as banks shy away from those deals.

Yes hard money is more expensive however its better to participate in a project and make some profit then not have a slice at all in my opinion.

Best of luck in all your endeavors.

Kortez Walker · Answer

Thanks @Ben Stoodley

best regards.

Ben Stoodley · Answer

Definitely @Kortez Walker ! Keep your eyes open, always network and look for the best deals/lenders and build long term relationships with them... this will get you the best bang for you buck.

Kortez Walker · Answer

@Ben Stoodley

so thats not bad its my first time I just need a good one . I have the title closing fees and things too and thats pretty much it. THats awesome I appreciate it. This will be a good way to get me started

Ben Stoodley · Answer

Decent deal, seems fine to me. $20k on this deal is good. Interest only is good, assuming it is at a average rate. $2k in fees isn't bad. So far seems ok @Kortez Walker

Kortez Walker · Answer

@Ben Stoodley I'm still running numbers because I'll do it in a month or so. The purchase price will be from 15k. The house will be worth 65k arv.They'll give me half of my appraisal value with is 30k and Ill pay the 2000 finance fee and the half of rehab estimates the be 10 to 15k. Interest only in 6monthsI would pay back the 30k plus the title and closing cost fees thats really it

Mike H. · Answer

The devil really is in the details when it comes to hard money.

The 2k "loan fee" on a 20k loan seems high (10%) but given how small the loan amount is, thats probably fair.  But I would echo some of the other comments. Is that the entire set of fees?  If so, thats decent. If they need to tack on some sort of application fees, etc, then maybe not.A reasonably interest rate for hard money is 10 to 15% so if its more than that, you might want to question that a little too.

Given how small the loan amount is, this may be the best way to take  this deal down as most banks wouldn't want to do a loan this size.  But  that begs the questions. If it doesn't sell, are you going to be able to  refi it with a regular bank into a permanent loan so you can turn it  into a rental?

One other item I had a question on. Does this loan include purchase plus rehab costs rolled into the loan? How much money do you have to put down total? 10%? 20%?

I'm always amazed when I see a hard money lender pitching me that they require 20% down. That makes no sense. Why should I put down 20% and pay the crazy fees and super high interest rate? At that number, I might as well just go to a regular bank. What they're charging me in fees and rate ends up being about 30% down on a deal anyway.To me, those are the types of hard money lenders that are really just preying on people with bad credit and the like. Or people with a really unique deal and they are an option of last resort. Not a lender that you want to build a relationship with.

But one of the real values with hard money for buy and hold is your ability to preserve your capital.   For flipping, you are still preserving your capital which is good in case you go over your rehab budget I guess. But essentially you're using hard money as an alternative to finding a money partner.

You just have see that its cheaper to pay the hard money lender fees (points plus higher interest) than it is to split your profits with a money partner.  Usually, it is. And thats really where I see the value in a hard money lender if you're flipping. The assumption is that you don't have enough money on your own to take the deal down. So you're using hard money in place of using a partner because its cheaper to pay the fees than it would be to split the profits 50/50.

i.e. Lets say you were all in at 70k on a house that sells 110k. If you used the hard money lender, maybe your fees were 3,500 and the interest only payments were another 3,500. Thats 7k in fees/interest you just paid.

But your net profit ended up being 25k on the deal. So the hard money lender got 7k. A partner would have gotten 12.5k.   Using the hard money lender saved you 5.5k!

Ben Stoodley · Answer

What was the purchase price and what do you think the exit price will be? You mentioned interest only, at what rate are they charging? Is $2000 the only fee they are charging? @Kortez Walker

Hard Money loans are they ok?

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