If you are reading this article you are probably searching for 1 of 2 things… A Hard Money lender to fund your deal, or a real estate investor to lend your hard money too. Either option is fine as Carter is going to dive into detail on how to accomplish both goals! Hard money lending can be very lucrative in the real estate space & can allow you to build a large passive income stream if done properly.
Introduction to Hard Money Loans
What is a hard money loan when it pertains to real estate? The simple way I like to describe it is a short term note that is secured by a deeply discounted piece of real estate. Hard money loans have high interest rates & points up front, & they are for 6-9 month terms. For many investors hard money loans are the last option. However, in certain circumstances it just makes sense to go with a hard money lender over waiting on your local commercial lender.
Typical Loan Terms for Hard Money
As of the time I am writing this article we generally pay between 10-13% interest on our hard money loans (annualized) & 1-4 points upfront. For most hard money lenders they collect a loan origination fee. This is the upfront cost for the work they put in to fund your property. Normally you can expect to pay somewhere between $500-$1000 for this & it does differ from lender to lender. NOTE: Make sure you get the entire breakdown of the upfront fees associated with each loan.
123 Main St, Oshkosh, WI
ARV (After Repair Value) = $150,000
Purchase Price: $64,000
Repair Estimate: $23,000
Monthly Interest Payment (12%): $975/month
Upfront Points (2%): $1950
Loan Amount (65% of ARV): Maximum Amount of $97,500
Origination Fee: $750
6 Month Hold Time would Come Out to: $8550 (17% Return Annualized)
If you are in need of financing please reach out to Carter at firstname.lastname@example.org
In the above example I broke down how I typically fund hard money loans & what we normally pay for loans. Because we have the cash availible we can fund these deals within 7 days of receiving your loan package.
Requirements for a Hard Money Loan
Unlike traditional bank financing hard money lenders go off of the deal in hand. In most cases hard money lenders do not check your credit or background history. If the deal makes sense the hard money lender is typically open to funding it. As a hard money lender ourselves we typically require our borrowers to have the following:
- At Least $15,000 in Cash Reserves
- Prior History of Real Estate Investing (Open to First Time Investors for the Right Deal)
- 1st Position Notes Only
- Loan Points & Origination Fee Paid Upfront
- 10% Down Payment Required
- Maximum Loan of 65% of ARV
- Insurance Policy on the Property w/ us a Mortgagee
These requirements give us a barrier of safety incase someone were to default on the loan & we had to foreclose & take the property back. Lucky for us, this has NEVER happened. If it did happen, we would still end up with a nice profit margin even after attorney fees paid & closing costs based upon where our loan amount is.
What Types of Properties to Buy/Fund
Property types will differ across the board and it all depends on what makes sense at the time of investment. Some lenders are willing to do a 12-18 month note for the right deal. In the case that you have to reposition a larger multifamily property it would make sense to have a longer term note so you can renovate or stabilize the asset. If the loan is only 6 months then there is a good chance that you would only be able to get through part of the renovation or stabilization period. For all of our single family hard money loans it is a 6 month term with 2 Point extension fee for another 3 months.
Like I had mentioned previously it all depends on the asset that is being borrowed on. Most hard money lenders are open to what they have experience in. So that could range from single family houses to apartments, commercial buildings, mobile home parks, or even self storage.
Finding the Right Real Estate Investor to Lend Too
There are a lot of “real estate investors” out in the market, but how do you know which ones are actually doing business? This is the magic question that all hard money lenders need to ask themselves. Are you more comfortable lending to someone with a track record or do you want to help someone out who is just starting?
I personally am quite risk adversed when it comes to investing money in real estate. I typically prefer lending to investors who have done at least 2-3 deals & have profited well from them. I do also enjoy sitting down & meeting with the investors prior to lending out money on deals. There is something about meeting someone in person that helps you understand their situation or personality better than over the phone. An easy way to verify that an REI has done deals is to ask them to provide their last 3 HUDS from closings. (Also known as closing statements) I typically request when they sold the properties to verify they are making a profit. However, if it is a rental property I just check the purchase amount & the actually market value via running comps. I do have a real estate license so this is quite easy for me to do.
How to Make Your First Hard Money Loan
Once you have found the perfect investor & they have found a deal you are good with funding then it’s time to start the process. Typically, if you are working with an experienced investor they should be able to make the introduction to the title company who will draw up the mortgage on the property at the agreed upon terms. The mortgage will be recorded against the property in the first position so at the time of sale or refinance the investor will have to pay off that amount according to the mortgage. A lot of the more experienced hard money lenders eventually have an attorney draft up an actual mortgage that is reused for future deals to come. Upon a title search being complete & all mortgage docs submit, then it is time to close. You will wire transfer the funds over to the title company & they will coordinate everything from there. Always request that the borrower send you before & after photos of the properties so you can get an idea on what work is being completed! And it is always fun to see a transformation 🙂
Start Investing Today or Reach Out to Secure a H.M. Loan
If you would be interested in investing with us here at CB Home Solutions we would love to connect with you. Please give us a call at 920-215-4201 or fill out the form on our “Contact Us” Page. Or if you are looking to obtain financing on a rental or rehab property you have under contract please email us at email@example.com