Pros and Cons of Hard money lenders?

Question

I am a new real estate investor, I didn't think I was in a very competitive market but it turns out I am.  I keep getting beat out by all cash offers.  I'm considering a hard cash loan.  Saving money isn't an offer for us it would simply take far too long to save up enough.  Are hard money lenders good for getting started?  Pros and Cons?

David M. · Answer

@Jayna Stevens

Hard money can be useful since you don't have all the conforming loan restrictions.  The high interest rate is offset slightly since its only an interest only loan and you have to refi out of it in usually 6 or 12 months.  Also, it lets you purchase a property that is really run down.

Many hml can refi you into a conventional loan.  Its just another loan for them to originate for you.

So, its just like refinancing any other loan.  Remember, the hard money loan is still a mortgage because its secured by the real property.  So, you need to get your paperwork all in order with a lender (be it the hml, a bank, a credit union, mortgage lender, etc.) so that before the hard money loan expires/is due, you can refi into a conventional, long term loan.

If you understand the brrrr process and its refi step.  Its the same thing.  You were going to buy a property with a conforming residential loan before anyway and refi it for the brrr.  Now you are using a different loan product, a hard money loan, but its still just a loan.

LIttle bit of a broken record, but I hope it helps.  I'd be happy to chat if you think it would help.  Just send me a direct message.  Good luck.

Michael Ablan · Answer

@Jayna Stevens -

Pros - Fast closing, construction funds given, credit score usually not a factor

Cons - Short term financing and expensive

You need to have more than 1 exit strategy and you need to have enough funds to carry the interest payment in the event that things don't work out.  The key is to quickly get in and then out again.

Nicholas L. · Answer

@Jayna Stevens I have to ask - do you have any cash of your own?  As others have said, hard money is not free - you're paying interest every month on the balance until you pay it off by refinancing, and if you can't refinance to cover the full balance is obviously still due.  You need to be pre-approved for the mortgage you're going to take out before taking out the HML and buying the property.

And, if / when you refinance out, you still need cash for capex and repairs - something major might happen while you're in the process of renting out the property.  It's just not possible to do this with no cash at all.

Sam Horton · Answer

@Jayna Stevens The refinance would occur once the rehab is completed and the unit is rented out this way it's an income producing property. Then you grab all your hardmoney docs go to a conventional lender of your choosing and apply for a refinance. At that point, whomever you choose to refinance with will send out an appraiser to value the property. Whatever they value the property at typically most banks will want you to keep 20% equity in the home so you can take 80% of whatever the appraised value is. From there use that to settle your hardmoney loan.

I'd also recommend finding the bank you want to refi with and get pre-approved before you start rehabbing (with the assumption there is 20% in the home, and its income producing). This way you know going into the BRRRR that a bank will approve you for a refinance.

Sam Horton · Answer

@Jayna Stevens A couple thoughts.. Yes absolutely, hardmoney and or private money can be a great option for investing. Just like anything else, do your research though. Make sure you know what the normal rates, points, and terms are for hardmoney lenders in your area. Every hardmoney lender can have a different structure or requirements to work with them.

Pros: They typically only care if the property is actually a deal, meaning below market value and that you can add value to the structure by rehabbing it. This means they don't care as much about your personal financials. They obviously provide cash to close the deal and allowing you to close quicker as a result. A lot will finance the rehab costs aspect as well. Interest only payments on the debt for the length of the term.

Cons: Higher interests and points than your conventional lender. Make sure you ask about any extra fees. Most will inspect your progress and allow for draws for the rehab.

Hope this helps

Andrew Bang · Answer

For sure, just need to make sure there is enough room in the deal to cover the interest payments/fees of the loan in addition to the expenses you were already calculating and the profit.   Hard money is a great way to scale your business and leverage the funds you have available.  I would suggest finding some local lenders that are familiar to the city you are investing in.  A good place to start are your local wholesalers, they can be a good referral source for HML's that can close quickly and good terms.  RE meetup groups are another place to network with lenders.

Ashley Hall · Answer

Thank you for this question. Thank you all for the great answers!

Walter Williams · Answer

@David M. thank you for this information. Great response.

Jayna Stevens · Answer

@Sam Horton

I'm thinking about doing a hard money lender now for the Brrrr process.  How does that work during the refinancing stage?  I've read that you refinance with a seperate bank and get a long term mortgage with them and use it to pay off the lender, but I'm not quite sure I fully understand that process.

Pros and Cons of Hard money lenders?

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