Hard Loans Explained

[David Lowe]

Can anyone tell me exactly how a hard loan works? I was under the impression that if a house was $500k and you brought in $300k of your own cash, you could get a high interest hard money loan for $200k to allow you to effectively purchase the property for $500k cash. Is this correct? What are the pros and cons of using this type of financing and are there better alternatives?  

[Ben Stoodley]

Hard money lenders and private lenders are essentially the same idea. To me, private lenders are your actual individual investors, that will lend you money for your project for a certain return or equity split. Hard money lenders are usually groups or companies that have much larger funds to lend. Regardless, both are great options and should be used for your real estate investing, especially flipping. The shorter term deals like flipping are most benefited from hard money loans. 

HML are asset based and can close very quickly (less than 10 days), lending somewhere around 65-70% of the ARV (After Repaired Value). The small amount of "skin in the game" required by the borrower can usually be made from multiple sources (2nd position gap lenders/private lenders, seller carry back, cross collateral, personal capital, etc). Interest rates range from 9-12% in CA and come with 2-4 origination points. Although the rates are high, the speed and ease of HML allow you to acquire properties rapidly, build capital rapidly, and build your business bigger and faster. HML shouldn't charge any prepayment penalty and you should definitely call around to get an idea of all other fees associated with the loan. Typically, HML will charge around $1500-$3000 in fees, most all are unnecessary.

Being asset based, you should try to have a deal in hand before actually selecting your lender. HMLs will need to underwrite an actual deal to give a quote. So the stronger of a deal you bring them, the better a quote they can provide you with. There is plenty of money out there, finding the good deals is the hard part. Hope this helps, feel free to contact me with any specific questions.

All the Best,