For some, the thought of hard money conjures up notions of loan sharks threatening to break your legs if you don’t pay on time. While not all hard money lenders are ideal business resources, most are knowledgeable, professional and can be used to great advantage in your real estate investing business.
With the lack of conventional lending products available to real estate investors, most investors turn to hard money financing as a bridge loan between the acquisition of a property and the permanent financing. Of course, hard money is not cheap, but typically is well worth the money for the purpose it serves. In most areas, the more prominent hard money lenders charge around 5 points and 15% interest. However, with local networking you may find private lenders willing to charge less.
One of the biggest advantages of hard money is the ability to borrow funds for renovation expenses. Most investment properties have some equity potential, but the average home buyer is often discouraged by the less-than-attractive condition of the property. As investors we create margin by having the ability to find, acquire and renovate these properties. The ability to finance the purchase and repairs is key to this equation, and hard money is one tool that allows us to do just that.
In today’s market, an investor obtaining a conventional loan would expect to pay 20%-30% down just to acquire the property, and then come up with out of pocket cash to complete minor renovations. As an alternative, an investor may be able to use hard money financing for the purchase and repairs, while having to place only 10% down on the total cost.
Once the property is acquired and renovated using hard money, the investor can then employ a conventional lender for the permanent financing. Since the renovations presumably have increased the value of the property, the refinancing lender can use the new appraised value in determining the investor’s maximum allowable loan amount. Typically, a conventional lender will allow financing up to 75% of this appraised value. Best case, the appraisal will be high enough so that the investor can refinance the balance of the hard money loan as well as closing costs without any additional money out of pocket.