Why You Should Use Hard Money Lenders to Finance Your Investment Properties

Question

Private money lenders, also called hard money lenders, don’t operate with the same restrictions imposed on banks and other financial institutions. This gives hard money lenders more flexibility as compared to banks. Here are two more reasons why hard money lenders are financing more investment property this year:

---A Need for Speed: Some banks are taking months to make decisions on their loans. The government shutdown has also contributed to a lot of loans being in limbo.

---Fleeting Opportunities:  There are many real estate markets in the U.S. that are very competitive. This is another reason why real estate investors depend on hard money lenders.

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Ann Bellamy · Answer

The definition of hard money is a loan based only on the hard asset, not soft criteria such as FICO, DTI, etc.  So registration with DRE has nothing to do with whether a loan is a hard money loan.

The term private lender is a heated topic on BP.  Personally, I use the term private to mean non-institutional, and is more of a generic term than many here on BP consider it to be.  BPers tend to use it to mean money from family and friends.

I don't agree with Corey that hard money lenders operate under fewer restrictions than institutions.  We all operate under the same restrictions, it's just that non-institutional lenders tend not to limit themselves to residential lending, and therefore appear not to have restrictions.  The truth is the law applies to all, and hard money lenders will do loans that institutions consider to be too risky.

@Bryan L. , I'm going to address your concerns/annoyances:

Not lending in all states:  a true hard money lender is typically very local, and has a knowledge of the real estate climate, real estate market and legal requirements for lending in specific areas.  Some larger lenders who also do residential lending have licenses only in specific states.  I personally lend only in two small states because  1.  I travel to every property personally,  2.  I have infrastructure to get comps only in 2 states, 3.  I have trusted attorneys in only two states, 4.  I have buyers to sell a property to in the event I have to foreclose, but only in my area,  and the list goes on.  I choose to keep my business local, because I don't want to expand.  I have plenty of opportunity within my geography.

Not lending in small towns:  There are fewer buyers in rural areas, both as an exit strategy for the rehabber, and as an exit for the lender in the event for foreclosure.  I lend only in the southern half of NH, not the entire state, because there are more deer in Northern NH than humans, and deer don't buy  houses. When the economy contracts, people tend to live closer to jobs, which are more plentiful in more populous areas.

Not lending below a certain size, such as $100,000:  It takes the same amount of time to research and close a $50K loan as a $500K loan, but the amount of money made in points and interest is quite different.  There are some costs which are also fixed, such as the cost to visit a property, payroll for research and loan processing and servicing, attorney/title search costs, etc.

Karen Margrave · Answer

@Corey Dutton  For those that are new to financing, etc., it's important to know that not all private money loans are hard money loans and often come from relatives, etc., and hard money doesn't necessarily just come from private parties, but can be from various types of funds, etc.

Karen Margrave · Answer

I do not claim to be any type of expert on financing, and that's why I invited in a few more people to add to the conversation

@Corey Dutton. As to the statement that 'non bank loans are fairly unregulated', what do you mean? Do you mean that private money loaned through a hard money mortgage broker actually has less regulations than the same money would have if loaned  through a bank? Or do you mean that non institutional lenders have more flexibility in setting their lending criteria and risk factors than a bank, which has to answer to shareholders, etc.? Doesn't the SEC regulate all types of loans?

Do all loans need to be made through a licensed mortgage broker, or is that a state regulation? What is NMLS?

I'm not picking on anyone, just trying to play the devils advocate and get some answers to enable new investors to understand the whole niche of private, hard money, financing, etc.  I know Bill Gulley thanks for answering the call.

Will Barnard · Answer

Though many hard money lenders like to call themselves "private lenders" they are not and there are distinct differences between the two types of lenders. Though they are often co-mingled and interchanged, I think it is important that BP Nation understand they are NOT the same, regardless of what they call themselves.

Corey Dutton · Answer

I agree. If you don't know what you're doing or first time using a hard money loan, do your homework and talk to someone who has done it successfully already!

Bill Gulley · Answer

Look on the internet Bryan, tons of them. Might try looking for a partner. :)

Bill Gulley · Answer

Exactly! LOL,

I wasn't intending that as a dig at all Ann or Will, I can see it can read that way, not the intent.

I found being employed at a state bank in compliance (after the examination days) to be busy, stressful and for less money than I was accustom to or expected, being in "management".  Another example of the requirements would be the "Call Report" you can find that I suppose on the FDIC site, having to keep up with the data can just be "brain damage" that HMLs and brokers never have to address. It filled the employment time (wife saying get out of the house) to move on.

That is what I meant by "real" banker, one who has suffered in commercial bank operations.

You're lucky if you can make good money in lending without being in banking! :)

Bryan L. · Answer

I'll say that I would really like to find some good hard-money (or private-money) lenders so that I can do more deals.  The problem for me though, is that I mostly find my deals on the MLS and they tend to have tight margins.

I'm currently using lines of credit (prime+0 on one and prime+3 on another), and 0% balance transfer credit cards.  In addition to the low rates, I have no points on the lines of credit and very low "closing costs".  I can buy a house with about $500 closing costs all total.

I currently have enough capacity to do 3 average deals at a time, but would like to be able to do 4 or 5.  But when I start looking into hard-money (or private-money), I'm typically coming up with 3-5 points ($2000 - $4000), higher carrying costs due to higher interests rates ($1000 - $2000), and higher closing costs on the front end (~$1000 more).  Many of the deals that I want to do just won't support these added expenses.  I mean, I could do them and still make a small profit, but often not enough to justify my time and risk - especially once you consider the after-tax profit.

Ann Bellamy · Answer

@Bill Gulley undefined

"Don't have to take my word for it, ask any real banker. :)"

LOL,  as opposed to a "fake" banker?

Corey Dutton · Answer

@Buddy LaRue I know some people I could possibly refer you to out there. We don't lend there but please shoot me an email privately and I can give you their contact info. It's a start! Maybe not 70% ARV but look into it anyway...

Why You Should Use Hard Money Lenders to Finance Your Investment Properties

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