The biggest issue I hear when it comes to starting a house flipping business is “I have no money”.
In fact, the second reason is so far behind this one, it doesn’t even register as a legit number two.
Sure, there’s fear, “knowing what steps to take” and “where do I start” reasons why people don’t start flipping house (all legit reasons by the way).
But the “I have no money” reason is the number one reason why people don’t get started flipping houses.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
Enter Hard Money…
There are many ways to flip houses with not a lot of your own money, but the one source that’s overlooked the most is hard money.
The majority of new investors have no idea about the benefits of using hard money. I’m not exactly sure why this is – but I think it’s because many investors think it’s a dirty source of money or has some kind of underworld connotations.
Not true at all.
Hard money lenders get a bad rap…and they shouldn’t.
“Hard Money” = Bad Money?
Sure there are some hard money lenders who are predators and want to see you fail so they can take advantage of you. I’ve met a few, so I know they’re out there.
But those guys are way in the minority.
The majority of hard money lenders are legitimate businesspeople looking to fund legitimate projects without taking advantage of you, the new house flipper.
The truth is I never could have started my house flipping business were it not for hard money lenders. Some of whom started as merely business associates but now I consider them dear friends.
But I’m here to dispel those myths and call out hard money lender for what they are – a great source of funding for your flips.
And knowing a little bit more about them may just help you get that funding for YOUR first flip.
8 Things The Experts Won’t Tell You About Hard Money
The following are 8 things you really need to know about hard money, that the so-called “experts” never tell you about! Let’s get into it!
1. Hard Money Is a Legitimate Business
Yes, it’s true, hard money lenders are actual business people.
Hard money is basically a business or an individual who lends as a business. What that means is that they’re no different than a bank – to some degree – because they in essence do what banks do, they lend money.
There is nothing scary about hard money but misperceptions of the “legitimacy” of these businesses exist. I think some would be house flipper think hard money is money borrowed in the underworld or something like that.
If you think this way, then I’m glad you’re reading here…because quite frankly, I didn’t know the term either until I started investing.
But the truth is that hard money lenders are legitimate businesses run as LLCs, S Corps or Sole Proprietorships with a definite business structure and specific strategy to invest. A bank does the same sort of thing, but with a hard money lender you don’t have to be approved by home loan review committees and all the bureaucracy that’s involved with a bank.
With hard money lenders, it’s just you, your deal and the judgment of the hard money lender to determine your ability to repay the loan.
2. Hard Money Just Means The Loan is Backed By a “Hard” Asset
I didn’t know this one when I first started flipping houses either…
I thought the “hard” part was…well, I don’t really know what I thought. I just thought it meant there was some kind of “hard danger” in dealing with people like this.
How wrong I was…
The word “hard” just means asset. So when you borrow money from the hard money lender he secures his interest with collateral which is the “hard” asset – in our case, it would be the real estate.
When you think about it, banks lend money in the same way. Although nobody calls them “hard money”…
3. You Can Make Significant Profits With Hard Money Loans
Yes, hard money lenders do charge higher than average rates for a loan, no doubt about it.
But it doesn’t mean you can’t profit – especially if you’ve done your house flipping math correctly by factoring in this “soft cost” to your equations. When you do this successfully, you can still make a nice profit.
In fact, one of my best house flips was funded by a hard money loan…so you can definitely make good money on house flips from hard money.
With hard money, you could be looking at rates of 12 to 18% along with 2-6 points. Pretty high rates, no doubt – but you can still make money even with those costs in your math.
So you want to be cautious when using hard money. You want to be able to look at your numbers when going into a property and analyze it, knowing full well your cost on borrowing that money.
If you know your numbers cold and factor in your financing cost and still come out ahead per the 70% Rule, then hard money is a good funding source for you.
4. Hard Money Loans Do Work for Longer Rehabs
If you happen to get into a deal where you’re paying an interest rate of 15% with 3 points, you’ll want to calculate that in a deal analyser and run the math and really see what that cost of money is going to be for different time scenarios.
Run those numbers out for six months and really see what they come out to. Then take all your soft costs, one of which would be your hard money interest, add in the real estate commission of 5%, and all your other costs. These holding costs include utilities, taxes, as well as any maintenance that’s needed.
Then add up all those costs and then see what that number comes out to. Run them for 12 months too – so you can plan your exit strategy in advance.
If you still are in the black under this longer term “worst case” scenario, then hard money is a good funding source for you.
5. Hard Money Rates are High…But Here’s Why
Why do hard money lenders charge such high rates? There’s a reason for that.
Hard money lenders know that house flippers coming to them are not going to be able to borrow money from a bank. It could just be that their credit might not be great or it could be that maybe they just didn’t report income on their tax returns like they could have or should have.
Whatever the reason, the rates are high for a reason. They need to protect themselves from downside risk with you, so in taking that risk, the money they make should be higher.
No risk, no reward.
6. Legitimate Businesses Do Business With Hard Money Lenders
There are many reasons why people can’t do business with the banks and just because you may not be able to get a loan from a bank does not mean that you’re not bank-worthy per se.
All it just means is that with the strict guidelines, it’s harder for banks to lend money out even if they feel good about lending the money to an individual.
Maybe it’s a small business and they did some creative financing with their accountant and the bank’s like, “Well you say you made $100,000 but it shows you made $50,000.”
If this is the case, it means you may be very bankable but because of how your tax returns look, you become ill suited for a traditional loan.
This is the reason why so many legitimate businesses use hard money loans – not just in real estate – but in all forms of business. This includes funding for capital equipment and for continuing operations.
Hard money is not just a real estate thing, it’s for all kinds of business financing as well. In many cases if a business owner cannot secure traditional loan funding from a bank, they turn to hard money. Whether it’s for a business owner to buy or lease new equipment, purchase supplies and inventory or remodel their offices, many business use hard money loans just like us real estate investors.
7. Hard Money Lender Typically Won’t Finance 100% of the Loan…But That’s OK
There’s a phrase called “do you have skin in the game?”
What that means is nothing more than, “are you putting any money into the deal?”
Most hard money lenders will want to know if you have skin in the game. If you don’t, they typically will not loan you the money – UNLESS they’ve done business with you before.
The truth is that when you talk to a hard money lender and you have no cash, then they will look at you a little bit differently.
I’m not saying they won’t do the deal in all cases, but I can tell you that when you have your own cash in the deal, they know you have a lot more riding on the deal and are far more likely to fund it.
When you have “skin in the game”, they know their interests are protected because you don’t want to lose your money as much as they don’t want to lose theirs.
It stands to reason. If you were a hard obey lender, would you want to lend to a house flipper who has no money to lose?
You probably wouldn’t…but don’t let that stop you. Even with no money, you can get the deal done.
8. If You Have Zero Money, You Can Still Get The Deal Done
In the beginning, you need to have skin in the game. But funding that portion of the deal through any of your own resources isn’t as difficult as you would think.
You probably have at least one of these: some savings, equity line of credit, credit cards or whatever means you have to put up the percentage required.
If you don’t, all is not lost.
It just simply means you will have to work a little harder than someone that has money to invest but that shouldn’t stop you. You just need to get creative.
You could fund your portion through a friend or a family member or a business associate or a partner.
With the hard money lender’s loan, the good news is that the amount you need to borrow is a far smaller amount of money than before the hard money loan.
This can be the difference between looking for thousand or tens of thousands of dollar and looking for multiple hundreds of thousands of dollars, depending on your geographic area.
The smaller amount is far easier to raise than the full amount – and between the two, you’ll have full funding for your flip.
If you’ve made it this far, please leave a comment below! Ask me any question regarding hard money lending or flipping houses with no money… I’d love to hear what you think!
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