Why I hate hard money!

Question

So I always hated hard money buy I never really knew why , probably because I use to hear so much negative stories about people experience that I never really took the time to really understand how it works so I automatically would shut it down with hearing terms or doing any calculations. But lately I’ve gotten more interested in learning about it & how I might be able to use it in my strategies  in the future . My ideal plan was to save up down payment cash & just purchase a rental here , then another down the road & maybe cross more bridges on the way buy to really be able to hit my true goals for my vivid vision I need to shift my strategy. I want to create cash flow of $5,000/M passive by 2023 from buy & hold real estate. In my projection looks like I would need a minimum of 10 doors that would cash flow $500/door , it looks in order for me to get to that point I may need to look into creative financing & learn more about hard money , Private money , and so I can BRRRR  & start my journey of pursuing those multiple doors that will creative that cashflow I’m looking for, which could turn in more like 15 doors that cash 5,000/month of income.  If anyone have any pointers or ideas / tips I can use to possibly achieve that, I definitely would appreciate it.

Tom S. · Answer

@Robert Collins  If you're looking to rehab and keep the properties as rentals, I would start some relationships with local banks in your area.  I started the HML route, and then quickly realized banks (portfolio lenders) could provide purchase + rehab financing for a much better and long term price.  Speak to the commercial lending department.  Being a small bank that they will keep the loan in-house, they have more flexibility on the property condition.

A few other tips, open an account for the tenants to deposit their rent with the same bank.  That way for the next loan, they already have the rental income verification.  Also most times, the loan offered to me at least, converts to a regular mortgage after the rehab is complete, so no need to refi.  So you save a set of closing costs.

Typical terms I'm getting are 20-25% down, 0 points, 5-6% interest, 20 year term.  Rate floats with prime after 5 years.  Doesn't report to personal credit.

Hope that helps!

- Tom

Shiloh Lundahl · Answer

@Robert Collins hard money loans can be looked at like a really inexpensive partnership. For example, let’s say I have a money partner that is going to fund the purchase and the rehab and take care of 100% of all holding costs and you are going to find, rehab, and get the property sold and the you are going to split the profits 50/50.

Partnership way

Purchase price 100k, rehab 40k, sales price 190k, time frame from start to finish 6 months. Profit from the deal 190k - 8% for closing costs = 174,800 - holding costs for 6 months of utilities 1800 = 17300 - 140,000 purchase price and rehab costs = 33,000 divided evenly = 16,500k profit each with you having used none of your own money.

Hard money way

Purchase price 100k, hard money lender funds 90k because it’s a good deal and you have a good track record. You bring in 13k for the rest of the cost of the purchase plus closing costs. You bring in another 15k to get the rehab going and once the rehab has progressed 15k, the hard money lender gives you another 15k draw for a $300 fee. You use that money for the next 15k in rehab costs and then you get another 15k draw from the hard money lender for an additional $300 fee. You use that last 15k from the hard money lender to finish up the fest of the 10k in rehab and then you sell the property for 190k - 8% for closing costs = 174,800 - holding costs for 6 months of utilities 1800 = 17300 - 140,000 purchase price and rehab costs = 33,000 - hard money costs (90k x 12% interest on initial amount is $10,800 for the year but it was only for half the year so it would be $5,400 plus $700 doc fee with 0 points. So the total Ian $6,100 so far. Then the first 15k interest would be $750 for 5 months and the second 15k rehab draw would be $600 for 4 months plus the two $300 fees for the he draws would be a total of $8,050 for the whole project with you using up to 30k of your own money though out the project).  You’re total profit then becomes 33,000 - 8,050 = $24,950 profit

In the first scenario with the partner, you used zero of your own money and made $16,500 profit. In the second scenario with the hard money lender you earned $24,950 profit but you didn’t have to use any of your own money. So you decide which is better for your situation. Do you want more money or do you want less profit in order to put less of your own money into the deal? The other thing to consider however is that if you use hard and the property sits on the market for too long then all of the profits may get eaten up over time in hard money costs so you need to really know the market and how to sell the home quickly. Otherwise you could end up losing money on what should have been a good deal.

Jaysen Medhurst · Answer

Hey, @Robert Collins, so why do you hate HML? You haven't used it, right?

If your ultimate question is "How can I create $5k/month of rental income in 4 years?" then BRRRR and using HML is a viable path.

BTW: $500/unit/month is probably a pipe dream, unless you plan to own free-and-clear. Set your sites closer to $150-200.

Tom S. · Answer

@Ley Nezifort  Correct, the initial downpayment would be locked in unless I refinanced.  However, because it's a small local bank and the rental deposits also went there into a checking account, it was just a matter of emailing the loan officer saying I wanted a refi to pull some money out.  Minimal paperwork and got an approval about 2 weeks later.

They would just overnight the new loan docs to me, I signed and notarized and overnighted back.  Then the funds were transferred into that checking account a few days later.

The advantage of building banking relationships!

- Tom

Tom S. · Answer

@Jason Larson  As Jay mentioned above, HML's or bank commercial loans typically don't report to credit reporting agencies.  That said, at least for me, I still had to provide a personal guarantee which means for the initial loan approval, they still look at my personal financials.

Hope that helps clarify.

- Tom

Anthony Gayden · Answer

If you don't want to use hard money then don't use it. I personally have never used it because it isn't necessary for my investing style (long term buy and hold rentals). There are other ways of getting things done.

Robert Collins · Answer

@Tom S. Thanks exactly what I was looking for , I’m going to take this vital info your giving me & apply it.

Ley Nezifort · Answer

@Tom S. May I ask how would you get your money out using that route ? Would your initial down payment be locked in the deal since you’re not refinancing ?

Jay Hinrichs · Answer

No HML reports to the credit reporting companies..

Dennis M. · Answer

A few thoughts ;

Hml is Best for flips not long term buy and hold . 5k income is not super difficult to achieve

It’s easier to get 20 doors at 250 cashflow than 10 that flow 500

Creative financing with little money can absolutely get you 5k a month income *if you apply the knowledge correctly

Why I hate hard money!

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