How does Hard Money work

[Matt Tobin]

How does hard money work ? Or would a bridge loan work better ? Or are they both the same thing - please help a new guy out Thanks Matt

[Joe Harper]

This is a cash out refi. Hard Money folks will want no more than 70% to 80% loan to value. And it's their value, not yours that they use. An appraisal helps but they usually discount that too.

To turn around and refi with a bank, and pay off the HML is tricky because banks need full documentation on your ability to repay, regardless of appraised value or LTV (loan to value).

So if you have solid tax returns for two years, with rental income profit (add depreciation back in), then a HML is your best bet when land rich cash poor, but some HML want a pre-payment penalty and always want points up front.

So, using made up numbers:
$100,000 value
$80,000 loan - 80% LTV
(Subtract existing payoffs and closing costs)
Subtract two to four percent of loan amount - points
= Net proceeds

$80,000 loan at two points means only net $78,400 before closing costs and payoffs.
So Borrow $78,400 pay back $80,000 if lender wants two points.
If four points, borrow $76,800 pay back $80,000

Payment is based on the $80,000 not the $78,400 or $76,800

Face amount of mortgage is $80,000, so local recording fees and taxes are based on that number, along with lender title insurance premium.

Payments are usually 8 to 12% interest only. Plan on 12% if your first deal. Payment is therefore $800 interest only. Principal of $80,000 never changes.
But you have cash for your rehabs and or pay off higher interest debt. So cash flow very likely improves through new or higher rent, or a retail ready flip.

Pre-payment penalty - some lenders require minimum yield, converted to minimum number of months or years that you must not refinance unless you cover the minimum yield (yield is used loosely here). Sometimes it's a percentage of the loan, sometimes it's a lump sum. I've had A 10% prepayment penalty and I've had a $2,000 prepayment penalty in the past. Deal size between $30k and $40k

So, have a plan to refi with a bank, find out their requirements today so you can align your tax returns to make them happy. It's harder than it sounds so make that call today and continually ask questions. Check back with them in six months and show them your books just to make sure you're on track. Two years' tax returns is the common requirement. Understand viscerally the schedule E.
I'm here to help with follow ups.