Hard money is an asset based loan that is typically issued by private investors or companies where you as the borrower would receive funds secured against the property. The interest rates are higher, the loans are considered riskier and the duration is much shorter than a conventional mortgage. Many new real estate investors don’t know about hard money or are afraid to use it. Don’t be afraid of using hard money it is just another tool in your arsenal.
Why Use Hard Money?
Hard money is easier to get and it is available when traditional financing isn’t. The last thing you want to do is lose a really good deal because of lack of funds. Hard money is often used when you find a distressed property that you want to rehab and flip. The terms are usually very short somewhere between six months and a year. The interest rate is very high but these are meant for short term quick deals.
What are Points?
Points are 1% of the loan amount and a hard money lender will charge somewhere between 4-6 points. Yes, that is a lot but you need to take all of this into consideration when making a deal. If there is big money to be made and no other financing options then hard money can work for you.
Why Is Does Hard Money Cost so Much?
Hard money lenders are banking on your ability to take a piece of property fix it and pay them back quickly, without any collateral or even so much as doing a credit check. You have little or no money at stake in the deal, the risk is entirely theirs, in fact it’s doubtful they will ever even see the property. The risks aren’t small, and that’s what you pay for.
How Do You Make Hard Money Work?
Hard money lenders will often finance between 70 – 90% of the after repaired value of a property (ARV) and you find a property that is selling for $70, 000 and it will need $30,000 worth of repairs, totalling $100,000. Once the property is repaired it will be worth $150,000. You borrow $100,000 that you will need to pay back plus 5 points which is $5,000 plus interest for a total cost of roughly $110,000 over 6 months. But then you sell the home for $150,000 leaving you with a profit of $39,000. That is why investors use hard money.
Hard money is expensive and should only be used as a last resort, but you can turn a very good profit using hard money when used carefully.