Hard Money Lender or Private Lender?

Question

I'm pushing myself to finally take the steps to start investing and stop talking about starting and I want to get my first investment property within 90 days, give or take. I hope that's a realistic goal, but regardless, I'm gonna be working my butt off to try and do it.

So, to be frank, I'm flat broke with not-so-great credit and I've heard a lot of other successful investors started off that way. How they were able to secure their properties, though, was through hard money or private lenders. Well, I have a list of single-family homes for sale in my area that I think would be a perfect first investment, the trouble is finding the financing. Now, it could just not be clicking for me but my first question is: Instead of buying the property outright from a wholesaler, could I get a loan for just the down payment and repair cost, reno, rent, and refinance to pay off the loan?

My second question is, I was thinking of opting for hard money lenders as opposed to a private lender simply because the next investor meet-up in my city isn't until next month. Would that be wise for a first-time investor? Or should I pace myself, gather more knowledge, and network at the meet-up to learn more and possibly find a private lender?

As always, I love any and all constructive criticism and advice. Any literature you can throw my way is also appreciated!

Account Closed · Answer

Hello, Kaitlyn!

There are private money lenders that lend hard money, being your 3rd option. I work for a private lender that lends hard money. The positives about using a hard money/private lender is that we do not require the same documents that a public bank and/or mortgage company does. We do not need proof of income, tax returns, etc.

Now, with private money lenders we typically do need to see some "skin in the game". Meaning you have to be able to come forward with some sort of down payment. I have seen some lenders lend up to as much as 95%. Us, personally, we need to see 85% at max and that is dependent on experience and FICO score. With having a lower FICO and no experience I have seen new investors start with house hacking with an FHA...low down payment, FICO can be as low as 580, etc. You can even start with that on a multifamily and get you some rental income while you live there. Just a thought.

Hope this helps!

Stephanie P. · Answer

Kaitlyn

Hard money won't work for an owner occupied property.  House hacking is still your best way to get started, even if your market doesn't have multi-family houses.  Rent rooms in your house. Rent the basement.  Rent the attic.  Get creative. Rent the garage or a space over the garage.  Owner occupied money, by far, has the lowest barrier to entry.

Start with owner occupied and go from there.

Stephanie

Edwin Epperson · Answer

Kaitlyn,

Good morning and I trust your week is starting off awesome.  I read your post and I see this struggle all the time with new investors or even experienced investors who have their capital tied up in many different properties.  I lend my own and partner investors' capital out to real estate investors in the state of FL, but I run a business, so... sort of a hybrid between private and hard money.  As a private lender, my primary concern is how do I mitigate risks?  The biggest risk; is taking a property back from a real estate investor.  How do I mitigate this?  By making sure the real estate investor has "skin-in-the-game", a euphemism that basically means the RE investor has something to lose if they default, or decide not to pay me.  The more someone has to lose the less likely they will default, and they will do everything in their power to stay current and pay me off as soon as possible, whether selling the asset or refinancing.  The next big risk I see is getting my capital back.  Known as the "Exit Strategy".  If a RE investor plans on holding the property (like you had mentioned) then BEFORE I will provide my loan, I need to know that the investor can get refinanced into a 30yr loan.  So I will want to know what their credit score is, what their financials look like and what their property management plan looks like.  Without a firm solid exit plan for a buy and hold I'll simply let them know I would only be willing to offer the loan if they sell the property.  This also plays into if someone is going to BRRRR a property, actually the BRRRR will not work if they cannot qualify for traditional financing.

To address your question about getting a loan to cover the closing and holding costs (what I call soft costs) and cost of construction (what I consider part of hard costs) you simply will not find a HML or PL that loans on these.  Why?  Because their loan would be in 2nd position (much higher risk of being wiped out in the case of foreclosure) as well whoever is providing the 1st position loan (typically used for the purchase of the property) may not even agree to give you the purchase loan because the RE Investor does not have skin-in-the-game.  So how does an RE Investor work around this?  JV's or partnerships!  This provides many more benefits than simply accessing capital.  If you JV or partner with a capital provider you would definitely want to partner with another RE Investor who can look at the number with you, has experience in the strategy your using, and has plenty of contacts.  They basically should become a mentor to you, not just a capital source.  I have seen plenty of times, where newer RE Investor line up "JV" money from family and friends.  If they are new and inexperienced this capital provider is not only taking on the most risky position of the capital stack, but they also are setting the whole project up for failure due to their lack of being able to provide those additional safety measures.

In closing, I would encourage you to err on the side of patience and reach out to local, successful RE Investors, to ask if they would JV with you.  If anything waiting until your next local meetup happens and asking experienced RE Investors at that meetup would be a great option as well.  I'm always open to having a conversation and helping you strategize the process but everything I mentioned above is what I would tell you on a call.  Best wishes, have patience, and always, always conduct your due diligence.

Issac San Miguel · Answer

As a lender we certainly want that skin in the game. Wholesaling would be a great way to build capital if the market is favorable to those tactics.

I would also suggest finding someone who may be willing to partner with you. Several of my clients use other peoples money for a share of the profits.

Steven Foster Wilson · Answer

@Kaitlyn Robinson lets be real for a second. You have no money and poor credit... No Hard money lender will touch you. A private lender (Such as a family member) would have to either really like you or be stupid to give you money.

With that being said it is absolutely possible for you to invest in real estate, you'll just have to do the extra work to prove it. One way I really like starting is by wholesaling. I started out calling here in Columbus OH about 2 years ago. I had no money and little experience. Within a matter of months, I had closed multiple deals and my business was up and going.

Account Closed · Answer

AWESOME!  I'm glad i could help. There are many ways to get started. Don't let anyone tell you not having 10's of thousands saved means you cant start.

Account Closed · Answer

Hello Jon! I have sent you a private message. We offer between 7-11.99% for bridge loans and 6-8.25% for 30 year.

Account Closed · Answer

I see,

Yes you can always use a hard money lender whether you are new or a seasoned investor. Besides the higher interest, the issue you may run into with a hard money lender is they will want more money down as a new investor + closing costs and what not. With not having much to put down you may not be able to find one that will finance a high enough LTV. With hard money lenders, we also lend a minimum amount. For example, my company's minimum is $150k , so even if you have the idea to go cheaper so the down payment isn't that high, you still have to meet the minimum finance amount.

Steven Foster Wilson · Answer

It is always good to get a few opinions. Find someone who is in your area that is successful in it that you could meet up and learn from. I think it would be wise to find a mentor.

Andrea N Pressley · Answer

@Asia Bortis I'm very glad I was this, I'm new and I needed to see the how!!

Hard Money Lender or Private Lender?

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