Are Hard Money Loans Worth the Hassle?



The title is a tough question to answer on several levels. The answer is “yes” hard money is a hassle when it comes to the cost and terms of the loan. The answer is “no” when you have a great deal but you need immediate cash to close it.

Beginning and Experienced Investors

The answer is also “yes” for those trying to break into the real estate investing business. These people have little or no track record. Banks certainly won’t lend to these people. And even hard money lenders are leery about handing over tens of thousands and even hundreds of thousands to a new investor that has never started or finished a project.

Sure, the hard money lender knows the money is secured by real estate that is worth much more than the loan. But foreclosing on a property is expensive. Hard money lenders don’t want the hassles or the expenses if the investor can’t flip the house. Or to have their money tied up for a year when the investor promised to repay the loan in six months.

Not so true with experienced investors. Those that have successfully flipped 30 or 40 houses without missing a beat. Hard cash lenders are going to be much more confident that they’ll see their money plus interest in four to six months.

That doesn’t mean a hard money lender won’t lend to an inexperienced investor. But it does mean a newbie can expect to pay a substantially higher interest rate. If a hard money investor has funds available for between 12% and 21%, it’s easy figuring out which rate the newbie will be paying and which rate the guy with 40 success stories will be charged. With risk, goes reward.

© Kheng Guan Toh - Fotolia.com

© Kheng Guan Toh – Fotolia.com

What Hard Money Lenders are Looking For

These people are savvy investors and are not going to give you access to their money without being sure you know what you are doing and understanding how you will repay them.

The six most important pieces of information they want are:

1. Exactly how you will invest the money.

2. How much more the property is worth than the money being loaned (LTV).

3. How you will secure the loan or investment. The hard money lender must be in the senior loan position.

4. When they will be paid back.

5. How much they will earn on the loan.

6. Proof you know what you are doing with experience.

Your investment strategy determines how the money will be invested, when you expect to repay the loan, and how much they will earn on the deal. Lots of flexibility. The hard money lender can earn a percentage of the profits or a straight interest rate or a combination of both.

Before You Talk to a Hard Money Lender

Proof that you know what you are doing is simple if you have a history of successful deals. But not as easy if you are just getting started. In either case, the place to start is by putting together a presentation you can show to prospective lenders. Make it a highly professional presentation with enough detail that the prospect clearly understands your investing criteria and provides the six pieces of information above.

Once you have everything in place, the remaining task is finding prospective private lenders to show the presentation to. That’s as easy an internet search. There is plenty of private money out there if you have the right investment on the table.

In a follow up article, we’ll look at how hard money lenders value real estate properties.

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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.