Hard money is a term for short term business financing and is most often utilized by real estate investors. Many people think of banks when they think about financing a home but banks are limited in what products they are able to offer due to regulations and oversight.
So what is hard money? Hard money is a private business loan that uses real estate or land as collateral. Hard money often has more flexibility and typical hard money lenders can fund deals much faster and easier than a traditional bank.
Hard money is unintentionally a well-kept secret that many investors are not aware. Many people do not know how they can use it in their business or how to implement it. My real estate business utilizes hard money and has tripled in growth since it became one of our regular business tools. Hard money can be a tremendous game changer once an investor knows how to employ it in their business.
Banks are a wonderful strategic business partner for real estate investors but they often do not offer short term financing solutions or have the ability to cut through the red tape. Hard money offers creative solutions to fast cash funding, quick real estate closings, offering businesses leverage to increase an investor’s buying power and the ability to scale a real estate business more quickly and efficiently. These strengths make hard money an incredible tool for ease and growth.
Benefits of Hard Money
- SPEED: Hard Money Lenders can decide on a loan application and property in 7 to 10 days.
- FasterFunds Lending in St Louis can decide as quickly as 3 to 5 days for a pre-approved borrower.
- FLEXIBILITY: Hard money has significantly less red tape. It is typical to have qualifying standards, but the underwriting process is typically in-house and the lender does not have to meet a board’s expectations, 3rd party investor’s standards or the 2010 Dodd-Frank Act regulations.
- AFTER REPAIR VALUE: Hard money loans are based on the after-repair value (ARV) of a home or commercial property. This gives the borrower added protection because the hard money lender will evaluate the market comparable sales and give a professional opinion what the property could appraise for fixed up. Banks are limited to lending on the current value of the asset.
- MINIMUM CASH INVESTMENT: With hard money, investors can use other people’s money to purchase real estate investment properties as well as to fund their rehab expenses on the same property. If an investor has less of their personal funds invested in a deal then their cash on cash return on their investment has increased.
- GROWTH: With traditional bank financing, investors must put 20 to 25% down on each property in addition to funding their own rehab expenses. With hard money, real estate investors can have multiple fix and flip projects going on at the same time while also using hard money to build a rental portfolio. Growth is truly limitless depending on how many deals your hard money lender is comfortable lending on at the same time and your business relationship with them.
Hard Money Examples
Scenario A: Investor A understands the benefits of real estate investing and growing a rental portfolio to build wealth and financial freedom. He has never heard of hard money and as a beginning investor does not know how to fund his real estate deals. He takes out a HELOC on his personal residence, adding a burden to his debt to income ratio on his credit score. The HELOC is for $50,000.
Investor A quickly realizes that $50,000 can only buy a very small house or maybe fund just the renovations on a larger real estate project. Investor A pivots. On to plan B.
Investor A networks and finds 2 houses for sale for $200,000, as is condition, that need $40,000 in renovations. He is so excited about making the investment in the homes that he starts a relationship with a bank. The bank informs the investor that he must put 20% down on the current appraisal price of the houses. Investor A realizes “YIKES! That’s $40,000.”
Investor A grasps that he could purchase the houses, but he would not have enough money for renovations or emergency repairs. Investor A feels frustrated and he doesn’t understand how to grow his business or come up with more capital!
Scenario B: Investor B loves real estate and wants to start investing in real estate properties. She pours herself into research on how to fund real estate deals and different financing options. Investor B finds an article called “What is Hard Money Lending in St Louis” by Arielle Morris and learns about all the benefits to hard money.
Investor B reaches out to FasterFunds Lending in St Louis and she gets preapproved to be one of their regular borrowers. As a benefit to working with them she gets first pick of their wholesale deals. Investor B buys her first house from their wholesaler and gets funding for the purchase price and rehab funds. Investor B has none of her own capital in the real estate deal and she closes at a local title company in 1 week!
Investor B has the entire house renovated in a month’s time. Her hard money lender puts her in touch with a great commercial bank lender who does a refinance on the house. The bank can lend on the full purchase and rehab because the house is now worth it’s highest and best appraisal amount. When the bank refinance goes through, Investor B pays off the hard money lender and has no prepayment penalties.
With the quick loan turnaround, the loan fees are minimal. Investor B has no money in the real estate deal. This is called the BRRR strategy. Now Investor B does multiple investment properties at the same time and never has to worry about financing. Her business is growing rapidly!
Frequently asked questions about Hard Money:
What is the average interest rate on a hard money loan?
The average interest rate on a hard money loan usually is between 10% to 18% and most lenders also charge points. These points can take place when the loan is originated or on the backend of the project or sometimes both. Some hard money lenders start with a higher interest rate and if you do a certain amount of deals with them over time then they’ll decrease your interest rate once a borrower reaches this threshold.
It’s important to discuss all the terms, interest rates, fees and points before committing to a hard money loan. Make sure the lender doesn’t have any hidden fees and that they have a reputable reputation within the market you are investing in. FasterFunds Lending in St Louis offers a competitive rate with no hidden or undisclosed fees. They are highly recommended by rehabbers and flippers in the St Louis area and take pride in their high quality of customer service.
Are hard money loans a good idea?
Hard money has at times been portrayed with a negative light. The loans are riskier for the lender and are for short term lending needs only. Therefore, the interest rates are higher than traditional bank loans. Having a higher interest rate can sometimes be portrayed as a negative if a potential borrower has access to less expensive forms of capital.
However, most people starting a business are not independently wealthy and the access to hard money capital allows anyone the ability to finance their real estate business goals and dreams. In this way, hard money is an industry equalizer and opens the possibilities of real estate investment to all. Hard money also allows people to scale their business through financing multiple real estate investment properties at once and creates the ability to grow a business faster.
In many ways, hard money is a tool that when used properly has more benefits then negatives. There are some circumstances where hard money would not be the best option for an individual situation. I always recommend researching all your local hard money options and alternative financing options and determining the option best suited for you and your business needs.
What loan to Value to expect?
Hard money lenders utilize the property as collateral for their loans. Hard money lenders are unique in the fact that the loan is based around the asset’s future value after all repairs are completed. Most hard money lenders can lend between 60 and 75% of the properties after repair value.
Many hard money lenders will look at the financial picture of the potential borrower as well. It’s important that a borrower be bankable and in a healthy financial position to make their monthly payments.
What kinds of properties can Hard money lenders lend money on?
Hard money is a commercial tool to help people build their business. Due to regulations like Dodd-Frank, it is not an appropriate product for a primary residence. This means that if you are living in the home a hard money lender is not able to lend on the real estate property. Typically, hard money is considered a commercial tool because it is used specifically for business related purposes only.
Some hard money lenders will also lend on office buildings, warehouses, industrial, self-storage, retail, or apartment buildings. These larger projects are not every hard money lender’s specialty. It is important to ask them if they have any limitations on what they are willing to lend on and what types of properties they specialize in.
Can I already have a loan on the property?
Having an existing loan on a property is not ideal. Most hard money lenders will require that they be in first lien position to be able to do a loan for you or your business. Make sure to clarify your individual situation and see what options the lender has for you.
How do I find a good hard money lender?
Finding a hard money lender with a positive reputation and track record is essential. Reach out to fellow investor networks and see who they use and how they feel about their services. A great place to ask for recommendations is at your local Real Estate Investments clubs and meetups and see who they recommend.
You can also google hard money lenders in your area and get a list. Ask them about their experience, terms and how their process works. Don’t be afraid to ask fellow investors if they have used them and if they would recommend them to other investors. Remember hard money lenders are often like business partners and it’s important to work with a lender that understands your dreams, goals, and business operations.
It is important to always know about your lending options and thoroughly research each one. The goal of this article was to present the information on hard money and why it is a tool utilized by many investors. I hope the information that we shared with you was helpful and that you now have a better understanding of commercial lending and hard money.
If you are wondering if hard money lending is something that might work for your next deal give us a call to find out exactly how it works – (636) 223-4262 or fill out the contact form.
Authored by Arielle Morris, Team Member of FasterFunds Lending St Louis, MO.