Hard Money Explained

[Mikielle Elum]

Hard money scares me.

I’m new to investing but I have two rentals that I purchased with conventional financing. I’m interested in flipping with hard money.

Can someone give me a break down of the process from start to finish and maybe some lenders in the Philadelphia area they recommend.

Thank you

[Riaz Gillani]

Hey Mikielle,

Hard money is a great resource for flipping. It actually gets its name because it's theoretically "Hard" to pay back. And understandably so - a typical hard money loan is Interest Only for 12-36mo, at around 9-10%. Balloon payment at maturation. But the exit strategy is generally to "flip" or to refinance and hold. 

The process is pretty straightforward and its benefits quickly become apparent. 

(1) Qualification - the lender doesn't look so much at the worthiness of the candidate as much as she does the asset. This is done with an appraisal to determine the "As-Is" Value and "After-Repair Value." The ARV is a valuation provided by an appraiser who considers the AIV, Proposed Renovations, and Comparables. The lender will then have a cap on the Loan-To-Value, Loan-To-Cost, and Loan-To-After-Repair-Value. That cap or "MAX LEVERAGE" is generally determined by the borrower's credit score and experience. Naturally, a more experienced borrower, with a high credit is a lower perceived risk. But, first-timers and average credit are not disqualified.

(2) DOC Collection - The lender isn't rummaging through tax returns or verifying the income of a candidate. As mentioned earlier, they'll want the background information on the candidate as well as their Scope of Work (itemized list of proposed renovations). But for assets, they'll just want to see proof of the down payment, closing costs, and 4-8mo of ITIA reserves. Usually in the form of 2-3mo of bank statements (to make sure the funds are wholly yours and not contingent on being repaid). Insurance, Entity documentation, title, etc. are all still required. But you're looking at a 30 day process or so on average. 

(3) Flexibility when it comes time to Repay - For a 12mo bridge, there's generally no PPP. When renovations are done, you can refi into a long term loan or sell at your leisure. Longer term loans, like a 24mo Bridge, may require that you stay in the loan for at least 6mo. But, if you've opted for such a route, you'll most likely be sticking in the loan for at least that duration...

There's more. But, I'd start with the above and start reaching out to verifiable lenders. 

Best of luck!