Hard Money Lenders
What are they? These are individuals or small companies who lend money to rehabbers to be able to do a rehab project on a house or building. They are not pay day lenders or pawn shops or anything like that.
They typically have their own investments in rental real estate and are knowledgeable about real estate. Obviously, they also need to have enough money to lend out to people. Considering that they lend from $20,000 to perhaps $200,000 or more on a single transaction, they need to have funds or access to funds.
I had thought that they did all the lending with their own money, but later in talking with some people found out that some of the hard money lenders had connections into insurance funds and money sources like that that would use some of their money on higher risk projects to try and increase the return on their overall portfolio.
What are the fees and rates?
The hard money lenders will charge you points and a high interest rate. A point means a percentage point of the loan. Typically the fee will be 4 to 5 percentage points, although if you are lucky, if you find the right lender, you might only have to pay two to three percent. So if the loan is for $50,000 and the fee is four percent, or $2,000 and you would only actually receive $48,000. Then the interest rate is typically in the twelve to eighteen per cent range.
Why are the rates and fees so high?
In some ways, its because they can be and because people are willing to pay. Why would someone pay this much when they could get lower rates at the bank?
1. Some people can’t get a bank loan so this is the only choice they have if they want to rehab a house.
2. Some people can qualify for a bank loan but don’t want to because of the time and effort involved and because of the other assets that the bank might want as collateral.
3. If done properly, and the rehab is done in a short amount of time and the property sold, it doesn’t really cost that much money.
You would never take out a hard money loan on a property you planned on renting. It would cost way too much and be very difficult to have a positive cash flow. This is when a bank loan or low cost private money should be used. But, if you are fixing up a house and turning around and selling it, you won’t be paying the high interest rates for very long.
Because of their experience looking at a lot of deals, hard money lenders can also help keep you from making a mistake in a purchase. If they don’t want to lend, chances are you need to take a second and harder look at the deal.
Typically, they will not give you all the money at once. They will split it into tranches (pieces) and give more to you once you have completed what you are supposed to. They will require you to give them a plan of what repairs your are going to make, in what order, and how much they will cost. They will also want to know what you are planning on paying for the property and what you expect to sell it for once it is fixed up.
If the lender doesn’t agree with these numbers, he may just say no. Or, he might tell you where he thinks you are wrong and how to change the numbers to ones he feels is more reasonable and that he will lend on.
How to Find a Hard Money Lender
Good hard money lenders can help you out and help educate you. Most have no interest in foreclosing and taking over the property. They just want to lend money and don’t want the hassles of foreclosure. However, there are others who look at it as a way to buy properties cheaply. There are many real estate clubs around the country. Search online for REIA which stands for real estate investment association. There is probably one near you. If you go to a meeting, you can ask around and get suggestions on good hard money lenders and ones to watch out for.