One Big Problem With Hard Money Loans You May Not Have Considered

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There comes a point in every real estate investor’s life when they learn about hard money loans for the first time…

…and then a later time in which they have a deal in front of them, which requires funding, and must consider using this financing strategy.

* If you are a seasoned investor/rehabber who already understands the basic mechanics and costs of hard money loans, feel free to click this link to skip to the end of this article to find out the “one big problem… you may not have considered.”

Some initial reactions involve shock, while others generate excitement.

I suppose it has to do with your frame of reference and experience as an entrepreneur.

If the only other loan you’ve looked into, or gotten, in your life is the mortgage on your primary reference, shock is more likely.

If you’ve previously sought out business loans, or even the possibility of partnering with others to get access to much-needed funding (to either stay afloat or to take advantage of growth opportunities), a double-digit rate is not that big of a deal.

After all, in most business scenarios, ACCESS to capital is more important than the price of it.

POINT OF INTEREST: Some hard money lenders prefer to be called “private lenders” or “asset-based lenders” so be aware of potential sensitivity to the term, “hard money.”

The fact is that thousands of real estate investors have made millions of dollars in profits by using expensive “hard money loans.”

Why? How?

As New York Times bestselling author of Rich Dad, Poor Dad, Robert Kiyosaki once said, “Everyone talks about buying low and selling high, but I prefer to buy high and sell higher.

Also, regardless of the cost of funds, borrowed money allows for the powerful leverage of OPM (other people’s money), often yielding the dealmaker an astronomical ROI (return on investment), and if they have none of their own money at risk, the upside ROI is technically infinite.

Problem-Solving

How hard money loans work:

Hard money lenders provide relatively high-risk, short term (typically 3-6 months) “bridge” loans, secured against the property itself (with a first position mortgage lien) that allow real estate investors to do two things:

  1. ACQUIRE (purchase) a property (typically distressed)
  2. REHAB the property by the services of a general construction contractor

 

What to expect:

  • The loan is ONLY for that particular property and project, and must be paid back upon completion and resale
  • 10-18% annual interest rate, with “origination fees” (points) of 1-10% off the top
  • Typically, the max amount of the loan will be 75% of the After Repair Value (ARV) based on THEIR appraisal of value
  • Most hard money lenders require a cash down payment between 10% and 35% on the purchase
  • Many hard money lenders will finance 100% of the construction costs, but some may require an additional cash down payment
  • Borrowers/Investors will typically have to make monthly payments on any balance outstanding, often interest-only
  • Hard money lenders usually disperse funds in increments, as needed to complete different phases of the project

One Big Problem With Hard Money Loans You May Not Have Considered

All of this information about hard money loans assumes 3 things:

  1. You have done enough marketing to actually find a deal
  2. You are good enough at negotiating and structuring deals, and can get it under contract at the right price
  3. You are either a full time investor or have enough time to actually manage this entire process and project

If you don’t have all three of these things in place, funding the actual deal is irrelevant.

THE ONE BIG PROBLEM WITH HARD MONEY LOANS, WHICH YOU MAY NOT HAVE CONSIDERED is that you can’t use the funds for anything until and unless you have a deal under contract, and it appraises out with the underwriter.

If you need a hard money loan to fund your deal, it most likely means you don’t have a pile of cash sitting around to put in play…

… which also means you do NOT have much discretionary cash for things like:

  • MARKETING AND ADVERTISING (to find deals)
  • EDUCATION AND TRAINING (to know how to secure and process deals)
  • WORKING IT AS A BUSINESS AND NOT A HOBBY (time to manage your deals)

Sound familiar?

So, what can or should you do if you’re just getting started OR you’re stuck in your business without any momentum?

How much capital is actually required to do those three things most effectively? That’s up to you, but even a modest $500 per month in marketing/advertising, $5,000 in education and training, and a $3,000 per month salary for 6 months puts you at almost $50,000 for the first year in business. And, you should give yourself at least that much time to get your business system and revenues in place.

You certainly can do a bunch of things for FREE in terms of marketing and educating yourself… and maybe even get another generous investor to guide you through processing your first couple deals.

But, wouldn’t it be a whole lot better if you have $50,000 or $100,000 or even $150,000 in seed money to do all those things at a much higher level, and hit your financial goals MUCH sooner?

 

ONE BIG SOLUTION

Fortunately, there is a little-known funding method available to real estate investors, and entrepreneurs, in general:

  • Allows borrowers to use up to $150,000* for ANY purpose (not just property purchase and construction)
  • Is much cheaper, overall, than hard money loans. *Typically 0% for the first 12 months, and 8-13% annually after that
  • Has no set payback term. Account are revolving credit lines
  • Stated income and financials
  • No collateral (the funding has nothing to do with any property)
  • Based almost exclusively on personal credit (680+ score, but co-signers are acceptable)

*Approvals, rates and terms vary per borrow, based on various financial qualifications

We’re talking about unsecured lines of credit, which can be converted to cash in your bank account.

Don’t get me wrong. This is not necessarily a replacement of hard money loans, but is probably best viewed as a supplement and pre-cursor to them. Use the capital to strategically generate consistent deal flow, and fund the deals with hard money, private investor loans, your own cash (in the future), with bank loans (if you can get them), and/or from equity partners.

There are several providers of this type of program, many of which charge a processing fee of 8-12% of the total amount funded (which is basically a wash because of the initial promotional 0% interest rate in the first year).

However, my brother Joe and I found and used a program called Funding For Flipping, which charges a flat funding fee of $3,000, and a (fully refundable) $495 application fee. In fact, they offer a guarantee of $50,000 in funding, or they waive all fees.

We received $120,000 within about 3 weeks and have put it to very profitable use for both our real estate investing and real estate brokerage businesses, with marketing, advertising, education/coaching, our own salaries to go full time, and a variety of operational expenses.

We highly endorse the program and company for other investors who are looking for alternative funding sources for any of the above mentioned needs. They have raised more than $425 million in funding for their other clients since 2008, and have an A-Rating with the Better Business Bureau (which means they have no unresolved complaints).

Visit FundingForFlipping.com if you’re interested to see how much funding you qualify for. You’ll be sent a bunch of information and opportunities to schedule a no-obligation phone consultation and pre-approval with one of their funding consultants, or to call them directly (844-519-0069).

Good luck and let us know how it goes!

(full disclosure: because we’ve had a positive first-hand experience with this company, we have become affiliates and may earn a referral fee if you go through our link(s) and get funding through them)