Pros and cons of hard money lending?

[Andrew Sprague]

I’m trying to weigh my options for financing a multi family. In what scenarios would hard money lending work for the down payment and why would it be better or worse than waiting and saving the money. Any advice from people who have gone this route?

[Evan Polaski]

@Andrew Sprague how you phrased your question, it sounds like you are considering a hard money lender to finance the down payment with a presumably traditional lender to take the first mortgage. Is that correct?  I am also guessing this is a "small" multi, with a purchase price below $1mm.

If so, the issue is most traditional lenders won't let you finance your down payment and most hard money lenders don't want a second lien position.  And you are too small to qualify into Freddie small balance loans.

Either way, if you are buying something soon, I would anticipate a hefty down payment that has to come from cash, either your own or partners.

As for your better or worse question, if you can find lenders to take lien positions in properties, it typically comes at a lower cost of capital than equity (yours or others).  In my experience, hard money lenders tend to cap out around 12% interest, with some fairly hefty closing fees.  But even then, the more you can use other people's money, the better your returns will be, and hypothetically, the more you can grow faster.