Hard money loans are often loans of last resort. They certainly have a place in every investor’s toolbox but these loans must be used appropriately. Terms and conditions for hard money loans vary greatly. However, they are typically short term loans with high interest rates and the real estate they are secured by needs to more than cover the amount loaned.
Your credit worthiness isn’t a factor when it comes to hard money loans. Then again, you won’t get a hard money loan for 85% or 90% of the property value. Instead, hard money lenders limit the loan amount to between 50% and 70% of the current value of the property securing the loan. That means they are more than fully secured by the property in the event you fail to repay the loan.
Additionally, you can expect to pay an interest rate between 12% and 21%. Also, most hard money loans have to be fully repaid within 6 months.
When Hard Money is the Right Money
Hard money loans are commonly used for short term investments because of both the high interest rate and the requirement to repay the loan in six months or less. The most common use of hard money is by investors rehabbing houses to flip. Savvy investors use hard money when they can purchase a property for 70% or less of market value. That enables them to use hard money for the entire purchase price and not put their own money in the deal.
Ideally, the investor will get into the deal for less than 70% and be able to use a portion of the hard money to rehab the property as well as make the purchase. It’s also possible to get hard money loans with a single balloon payment so that no payments are made until the property is resold.
Hard Money By the Numbers
We’ll use an easy to calculate property with an after repair market value of $200,000. Repairs are conservatively estimated to cost $30,000. A typical hard money lender would be willing to lend $110,500 to purchase this property.
$200,000 – $30,000 = $170,000 (current fair market value).
$170,000 X 0.65% = $110,500 (65% of fair market value).
However, the $110,500 doesn’t include the cost of repairs. The smart investor would make a purchase offer of $80,500 ($110,500 – $30,000) so that the hard money will cover the cost of repairs. Obviously, these deals don’t come along often.
Before using hard money, consider other options. These include keeping the existing financing in place and seller financing. Both of these are good options when the property is being flipped and the loan will be repaid in full in a short amount of time. These work better than hard money loans because a higher purchase price can be offered. Resulting in more deals being viable.
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.