Not that hard a decision – A Hard Money Lender, a Partner or Both?
It’s the age old question in real estate, Do I get a hard money loan or should I get partners? Some people choose to get partners because they feel that hard money loans are too expensive or to risky and other people choose to get hard money loans because they think partners are too expensive. While at the outset one may think that hard money lenders are too expensive, it may be surprising to note that they can actually turn out to be cheaper than a partner or when used with partners allow you to increase your buying activity. This is because you will be able to leverage other people’s money and will not be required to invest as much yourself. Therefore you can complete more deals if you chose to and even further improve the overall return on investment. However remember, leverage is not a good thing unconditionally, so use it carefully.
Here is a simple comparison.
Lets say a rehab deal takes 6 months with the following details:-
• Purchase Price: $200,000
• Rehab & Selling Costs: $50,000
• Sale Value: $300,000
• Partner share: 50/50
• Total Profit: $50,000
• Your Profit: $25,000
• Your Investment: $125,000
• Return On Investment: 20%
• Annualized ROI 40%
Here is the same deal if you went with a hard money lender:-
• Purchase Price: $200,000
• Rehab & Selling Costs: $50,000
• Sale Value: $300,000
• Loan Amount (65% of sale value) $195,000
• Loan Costs (4 points): $7,800
• Carrying Costs (13 PITI for 6 months) $12,675
• Profit: $29,525
• Investment: $75,475
• ROI: 39%
• Annualized ROI: 78%
As can be seen from the example above, the investment required has decreased by 40% (thus freeing up capital for other deals) while there is also a corresponding increase of almost 100% in the ROI. So if you used the balance of your funds to complete another similar deal, your ROI would turn out to be 4 times that as if you had partnered with a financier for 50% share.
Apart from the above financials which speak for themselves let’s look at some other aspects of hard money lender funding vs. partnership funding below:-
Advantages of working with Partners:-
• If they are real partners (and not just investors) they will split the work load. There could be synergy if your partner has experience and contacts in the business.
• Can close very quickly if you are paying cash
• Can do more deals than you could do by yourself.
• Usually a safer and more conservative route
However, here are the disadvantages of working with partners/investors:-
• You do most of the work, you may invest as much as they do, however you need to split the profits equally.
• There can be disagreements resulting in the opposite of synergy
• Consensus may take a longer time to reach and may cost you money
• You will be limited in the freedom of your decisions
• Legal issues & securities laws
While on the other hand here are the advantages of working with a hard money lender:-
• It usually works out cheaper than a partner on a return on your money basis
• Because of leverage you can buy more property (this is a double edged sword and can be good when making money or can be devastating in a declining market if you do not buy right).
• Potentially will need very little or no money down. It usually is based on the value of the asset.
However one needs to be wary of the following when working with a hard money lender:-
• Leverage, as mentioned above, can become a double edged sword.
• This is short term financing, usually between 6 – 24 months, and therefore may become a problem if your exit strategy is not working out and you can not find take out financing.
• If you do not have a good relationship with someone you trust and they do not fund the loan you can lose out on the deal and more importantly your credibility
• You need to be careful on who you chose to work with as Hard money lenders are notorious for being sharks, therefore it is important to get a referral.
I only choose to involve partners when I can see a clear synergy between our efforts or work with some investors that with whom I have built a good level of mutual understanding.
Many times what we do is use our funds combined with investors and hard money/private money loans to purchase properties. This allows our investors to get a better return than going out and paying cash for the property themselves and we use our expertise and time to complete the project and they collect a check.
Good luck in your search and if you need a list of money lenders feel free to drop me an email as I have an excellent list of hard money lenders which I would be open to sharing with you.
Here is a link to a real life example of a recent transaction we used a hard money loan to purchase. For comparison purposes I put a scenario of using cash.
[url]www.gabhartinvestments.com/article/hard-money-lender-a-partner-or-both/[url]
