Questions About Hard Money Loans

[Ben Morand]

Hey guys! My name is Ben Morand and I am a 20 year old college student interested in buy & hold investing. Over the past few weeks, I’ve been working on analyzing a ton of deals, hoping to find one that meets my criteria.

My main issue is that as a college student, I don’t have a whole lot of money to put down, nor a steady income source. Because of this, I have been drawn to hard money as a way to initially fund my first deal.

I have read Brandon Turner’s book on Investing in Real Estate with No (and Low) Money Down and feel pretty confident with several different methods of creative financing. However, if anyone is willing to help me out, I have a few questions left about hard money loans.

1) How are these loans generally structured? I know they tend to be shorter payback periods (ex. 5 years instead of 15-30 years). However, with this, are they generally more so balloon payments or traditional monthly payments? It seems as if, with such a high interest rate and short payback period, these loans would be astronomically high payments if not structured right.

2) How long does one generally have to hold a hard money loan before they can refinance to a traditional 30 year fixed rate? I know you need substantial equity in a property, so this number will vary from person to person, but generally, will it have to take 6 months to a year, similar to an FHA to conventional refinance, or can the refinance take place within a few months?

3) How likely is it that a hard money lender would fund the entire purchase? With this, do they often require some sort of collateral to compensate for the risk that they are taking?

4) When refinancing into a conventional loan, do the banks require additional income beyond the rental income in order to meet the income requirements (even if I am cash flowing positively with my property)? I have no other debt, so my DTI would be solely based on my rental property.

Thank you in advance to everyone that is willing to help! I know some of these questions might seem a bit naive, but I am just trying to understand this process a little better so that I can strategize how I will finance my first rental property. I am sooo hungry to get started in this industry so I want to learn all I can and apply it as soon as possible.

Thanks everyone!

[Cameron Rockwell]

Hey Ben,

I currently work with and learn from a Hard Money Lender in the Virginia beach area. Based on the questions you are asking I think you are mixing up hard money and private money. Private money is anyone with their own money that they want to lend to you for a higher return then they would get from a bank account. The terms of these loans are usually 5%-10% and the lender does not need to have any experience with real estate. For example I use my grandfather as a private money lender and just give him a first lien position, just like i would a bank. This is something you could use to leverage a down payment and just pay that back over lets say a 5 year term but that is up to the private money lender. They are usually a lot easier to negotiate with. A hard money lender is usually someone who has done flips or BRRRRs before and really knows the business. Their terms are usually 10%-15% and do not typically go past a year. My HML for example only lends out up to 6 months and then the interest rate doubles. That is definitely a situation you do not want to be in. I would recommend getting an experienced agent and a contractor you really trust before moving forward with hard money. You should also have some cash saved up to mitigate risk if things go bad. But to answer some of your questions.

1. Hard money loans are generally structured by them taking a primary lien on the property for a 2-12 month term, You will be required to pay interest on your loan amount either monthly or at the end when you either decide to sell or refinance out of it. This is where Hard money and Private money are different because they all play into different strategies. 

2. Hard money is typically only used for properties you are trying to rehab because the goal is to increase equity so that you can make money when you cash out. (Sell,Refinance) Hard money is not going to be used for a property that is already move in ready because there is typically not enough added equity to cover the high interest rate. If you plan to use private money to fund the down payment so you can get a traditional loan that is a strategy you can look into. 

3. Hard money lender will only fund the entire purchase and repair budget if it is less then 75% of the ARV (After Repair Value). This is insurance for the lender because he can ensure you make enough money to cover the interest while also making a profit. It is important to note that a hard money lender is on your team. Like David said he wants you to be successful so that you can come back and do more deals with him.

4. The refinance is the most overlooked portion of the BRRRR in my opinion. You want to make sure that the bank will actually approve you for a traditional loan. They also will only cash out 70%-80% loan to value because they need some equity. Think of it as a traditional mortgage. Most of the time you need a down payment to pay into that mortgage. Well when you need to refinance instead of you putting money down they simply just give you less money. That is another thing to budget for as if your calculations are off you might not get all your cash back.

Based on your post it sounds like you need to do some more research and assemble a good team before you get into hard money. I would start by trying to buy your first primary residence or first rental and just feel everything out. I am not saying do not take action, just work your way up to it. I am 23 years old so I know exactly how it feels to be excited. I would love to connect and share some stories about my first couple deals.