Hard Money is a term you will often hear amongst real estate investors because it is another way to generate cash for real estate deals. Hard money lenders are sometimes the only people willing or able to give you the money you need to get your deals done. Hard money is great for beginning investors who may not have money or for those who have bad credit and cannot qualify. Investors also use hard money when they need to purchase quickly. But what exactly is Hard Money and how do you find a good hard money lender?
What is Hard Money?
Hard money is no more difficult to obtain than ‘soft money’, but its terms are very strict because most hard money comes from private individuals with a great deal of money on hand. This is why hard money is also referred to as “private money”. The money used for investment purposes comes from people, just like you and I, not a typical lending institution. So their first priority is to protect their investment capital. This is why the terms have to be so strict.
Hard Money Terms
Hard money lending terms vary from lender to lender. It used to be that hard money lenders would lend solely based upon the deal or property at hand. They would only lend up to a certain percentage of the fair market value of the property, that way in the event of default, the hard money lender would profit handsomely if they had to foreclose or sell to an end buyer. Now, you will find that many hard money lenders, if they want to stay in business, require more than just equity to qualify. This is because the laws now are favorable for consumers. Consumer protection laws, time consuming and expensive court procedures, and so on have forced some hard money lenders to become even harsher when applying for a loan.
Here are some of the terms you can expect to see when borrowing ‘hard money’. Typically they will only loan you up to 70% ARV (after repaired value). This means that a hard money lender can loan you up to 70% of what the home is worth in repaired condition. So if you find a home worth $45,000 in the condition it’s in and needs $20,000 in repair work, and after it is repaired the current fair market value is worth $100,000, then typically they can lend you up to $70,000, which would cover the cost of the house and the repairs.
Interest rates vary from 12% – 20% annually and terms can last for 6 months to a few years. Many times these rates vary depending on your credit score and experience.
How to find a Hard Money Lender
Here are some tips to find a good money lender to help you fund your deals:
• Talk to other investors and ask for referrals. This is a great way to weed out the ‘bad’ and find the gems.
• Ask settlement/closing attorneys
• Accountants can be a good source for HML
• You can often find lenders attached to deals at the courthouse
• Insurance agents and mortgage brokers are both good sources
Private Lending
Private money lenders are usually individuals who have some extra money sitting around and want a better return. It could be your local dentist, another real estate investor, a retiree who is tired of his 401k earning negative returns, etc. Essentially, a private money lender can be anyone. Even better, the terms are highly negotiable and tend to favor you (the investor) more than hard money loans.
When you’re borrowing from a private money lender, you can basically set the terms… then tweak them to further fit BOTH of your goals.
Structure loans so they are easy to maintain
While you as a real estate investor might think that people will always want monthly interest payments… that’s not usually the case. For example, many private lenders will agree to be repaid with a singular payment when the property is sold (with a max number of months pre-built into the loan).
So, rather than making 12 separate interest payments if it takes 12 months to sell… why not make just one payment (principal + interest) when you sell? This is much easier from the admin perspective and lenders love getting one big check rather than a series of small ones. You should structure the loan so it works out well for both of you, and try to ensure there’s there is the least amount of maintenance and administration possible for everyone involved.
Integrity is a Must.
This should go without saying, but the key to successfully recruiting and keeping private money lenders is to always do exactly what you say you will do WHEN you say you will do it.
If you promise to pay 10% on a 16 month note with an option to pay it off early without penalty… well… you better live up to your word and do just that.
If you say the property will sell within 6 months and you promise your lender they’ll get their money back when the property sells (with interest)… you better do just that… and ensure that you sell as close to on-or-before that 6 month mark as possible.
The bottom line is this: If you always do what you say you will do, not only will you be more profitable in business in general, but you’ll enjoy all the private money lenders you need, hungry for the opportunity to lend you money.
Joint Ventures
Joint ventures are a great way for real estate investors to make money by partnering with others in the real estate investing world.
Joint ventures enable you to get more deals done and open the doors to bigger deals. Whether you have the money and need someone with experience, or you have little money but lots of experience and energy, JVs have something to offer every real estate investor.
When you are looking for a JV partner, here are some qualities to look out for:
• Find someone who complements your skills and experience – if you are broke, find a partner with money, but no time. If you have money, find a partner who has the experience and the time to deal with contractors, etc..
• Make sure your JV partner has a good track record – ask for references from previous partners or in your local REIA and also ask for details on deals they’ve done to see if the numbers add up
• What’s their credit like? If you are going into business with someone, you want to make sure they are good with handling money and aren’t going to burn a hole in your pocket!
• Carve out a list of responsibilities. Make sure each party in the JV knows what they are personally responsible for. Make everyone accountable so no one drops the ball.
• Do your due diligence to find out as much as you can about your potential JV partner. Forearmed is forewarned!
• Get all contracts and partnerships legally set up so they are water tight and all individuals are protected.
Interested in doing a Joint Venture to make money in real estate? Contact Ebere Okoye, CPA for consultation HERE
