Rich Dad Education – Real Estate Blog

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Hard Money Loans

A common mistake for many real estate investors is that they focus on only one way of putting together a transaction. There are many different strategies and many different financing options. Knowing when to use each technique will make you a better investor.

Each strategy and technique is effective when used correctly. Hard money loans are a very common financing option for investors, but they also have their time and place.

What is a hard money loan?

The easiest way to explain a hard money loan is that it is private financing. Hard money lenders are people that have access to a pool of money that they loan out on real estate. This pool is usually the result of a group of investors pooling their money together to finance real estate. They are investing in the financing behind the property rather than the property itself.

Since this is private financing, a hard money lender is going to charge higher interest rates for the money. These loans usually charge credit card type interest (10-18%). Because of the high interest, this is not a long-term financing option. Most investors use these loans for short-term financing.

If the loans have such high interest rates, why would you want to use this method? Keep in mind that most loan programs have their place and time. You are not going to use this financing option to finance every deal you do, but it is just another option. When it comes to creatively financing a deal, having multiple options is what it is all about.

Just because the loan is a high interest loan doesn’t mean that this isn’t useful. If you are going to turn around and resell the property, then the interest rate is not a primary factor in whether you’ll do the deal or not. The return on your money is far more important than the interest rate. You are not going to have the loan long enough for the high interest to make a large impact. As long as your profit is still in the deal, it makes sense to use the hard money loan.

If you are going to be using a longer term exit strategy like holding the property as a rental, you might use hard money to get into the deal, and then refinance the property with a traditional loan. Someone might do this if they are unable to get a traditional lender to finance the purchase.

Hard money loans are short-term loans. The majority of hard money loans will be 6-24 months in length. This will give you enough time to do what you need to with the property to make the deal work.

The reason that it is called hard money isn’t because it is difficult to obtain. It is called hard money primarily for three reasons:

  1. The higher interest rates can make the loan more costly than other types of financing. Even though it is high interest, the other benefits will help outweigh this problem.
  2. It is difficult to buy the property at a price that will qualify for hard money. Most hard money lenders do not want to exceed 65-70% of the ARV (After Repair Value). The hard money lender will determine what the property would be worth in its best condition, and they will finance up to 70% of that figure.
  3. The lender is going to give the loan based on the value of the asset (the property) rather than the financial strength of the borrower. The lender is going to be more concerned about the deal than they will be about you as a borrower.

However, there are great benefits for using hard money loans.

  • Fast turnaround time. It usually takes a traditional lender 30-45 days to complete a loan. Hard money lenders can do a loan in a much shorter period of time. Most of them can do it within 2-3 weeks and some can even do it in a matter of a few days depending on the resources they have available. If you need to come up with money quickly for a deal, you will want to keep this in mind.
  • Hard money lenders will finance 100% under certain circumstances. Most hard money lenders are not willing to finance more than 65% of the After Repair Value (ARV). If your purchase price is less than 65% of the ARV, then they could finance 100% depending on the lender. This could be another solution for getting into a property for as little down as possible.
  • Most hard money lenders will also include repair costs into the loan. If the purchase price plus the repairs is less than 70% of the ARV, they will include the repair costs into the loan. Since most traditional lenders will not include the repair costs into the loan, this is a great option if you are planning on rehabbing the property.

Here is a quick example of how this could work:

Purchase Price: $87,500

Value of Property After Repairs (ARV): $150,000

Cost of Repairs: $10,000

Since the lender would be willing to finance up to 65% of the ARV, they would loan $97,500 as their maximum loan. This $97,500 would cover the $87,500 purchase price as well as the $10,000 needed for the repairs. In this type of situation, you could finance 100% and have the necessary money for repairs. This could be a very attractive deal.

How do you find a hard money lender? There are quite a few ways that you can do this:

  1. Ask your traditional lender. Many lenders already have these connections set up. This is another way for the traditional lender to finance their clients if their traditional loan programs will not work.
  2. Real estate investment clubs. These investment clubs are a great way to network with other people. Hard moneylenders frequently go to these investment clubs as it is a way for them to get additional contacts and business. You might also want to ask some of the other investors in the club for additional referrals.
  3. Internet. The Internet is another great tool for finding hard money lenders.  Search for “hard money lenders” or “private financing” or even “rehab loans.” You can add the city or state name to find something local.

Hard money loans are just another solution for you to finance a property. You will not use hard money loans on every deal that you do, but if you are going to be flipping the property and it needs some rehab, then this is a great option to keep in mind.

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41 responses to “Hard Money Loans

  1. georgia gaines December 22, 2012 at 9:58 am

    do you have any names of these lenders? I need help in florida.

  2. mike December 23, 2012 at 12:22 am

    Bank loan you can foreclose! what is the collateral hard loan money ! what should the lender expect…..

    • Charlotte December 26, 2012 at 12:37 pm

      Hard money lenders will take the property from you if you don’t keep to the terms of the agreement.

    • Eric Tippelt (Uncle E) January 3, 2013 at 9:10 am

      Every hard money lender I have dealt with takes the property as the security, just like the bank. They register the loan at the court house, so they can forclose just like the bank. They have a loan agreement, that has to be signed (after my lawyer checks it over) that specifies what happens if there is a default. Since the lender has a low value to loan ratio, they only finance good deals. (good from a price point.) If the borrower actually puts some money into the deal as well, it might be a great way to pick up property cheap, if borrower defaults, without having to go look for it.

  3. JohnK December 23, 2012 at 1:13 am

    I just finished with using a Hard Money deal in late August…..this article is supremely accurate.
    I had the right numbers in the deal…the loan started in May and was paid off in 3 months.
    I signed a 67 page contract designed to nail me to the ground if I did not perform…it was on a loan that was for 30% ARV, a 24 month Interest-Only loan.
    Having this money did exactly what this article says….provided bridge/rehab funds until the sale was done….and, no bank was interested in this situation. Shop your deal to at least 6 lenders and keep exact notes of each deal offered. Be prepared for 2-3 rounds of negotiations as you narrow down your choice of lender. You’re the buyer.
    Remember, they don’t care about you as a borrower, they really don’t…..just the numbers in the deal. Keep all your bridges in tact as you negotiate, be a professional and you’ll have expanded your contacts and resources for the next deal.

  4. Kevin Presbery December 23, 2012 at 11:23 am

    Rich dad poor dad has been very helpful, I’m just learning the ropes with the real estate business through you guys, I can’t wait to get out there once I’m knowledgable..

  5. Babette Dickerson December 23, 2012 at 4:29 pm

    Thank you. That was very good information.

  6. Gerald Gaddy December 23, 2012 at 11:21 pm

    Hard money lenders is a great strategy to use depending on your investment goals. I plan on using a private lender when I am in the position to accept more risk and have more reserve capital. It is also a good investment tool to consider if you want to purchase your own home.

  7. Laurie Mangiagli December 24, 2012 at 2:02 pm

    The above article/explanation is excellent. I am one of the private lenders described above and my colleagues/partners lend throughout the U.S.. We absolutely look for great numbers for win-win scenarios.

    • John Kozak December 24, 2012 at 7:47 pm

      Laurie, May I have your contact information. My email is uanb24@yahoo.com.

    • Gregory Abner December 25, 2012 at 5:29 pm

      Hello I”m a Investor in Michigan can you refer me to any hard money lenders here in michigan?

      • Pete December 26, 2012 at 10:37 am

        In addition to the hard money loan costs, be sure to add the carrying cost into your numbers when you look at the resale of the property you are about to buy. Most investors tend to forget the little expenses that eat up ROI while they are carrying the property. Some of these expenses are utility bills, hard money interest payments (most if not all are interest only), and the closing cost as laid out in the HUD. I also always figured in a 10% overage in rehab. I never had one go perfect. Unless you are completely accurate in your initial walk through, your contractor, unless it is you, will charge for any changes. Also, be sure to rehab your house to market value. I have noticed many investors over rehab their investment and therefore overprice the house in their particular market. Never fall in love with your investment. Be unemotional and be analytical. Think Spock.

      • Laurie Mangiagli December 26, 2012 at 1:53 pm

        Dear Gregory, yes, I have 2 colleagues in MI and I will ask them if they’d like to be referred to you. I’ll keep you posted.

      • Rich Dad Education December 26, 2012 at 4:00 pm

        Start networking with people at your local REIA meetings and ask other investors as well as other lenders. Make sure that you get referrals. Another great way is to start networking with private money lenders.

      • Rich Dad Education December 28, 2012 at 1:12 pm

        Start networking with people at your local REIA meetings and ask other investors as well as other lenders. Make sure that you get referrals. Another great way is to start networking with private money lenders.

    • Steve caruso December 26, 2012 at 7:29 pm

      Hi Laurie,
      Could you forward me your email to keep on file. I’m located in New Jersey and am not comfortable with the lenders I’ve dealt with previously.
      Thanks

    • Nalo December 27, 2012 at 6:56 pm

      Hi Lauri,

      What is the name of the company you partner with?

      • Laurie Mangiagli December 28, 2012 at 12:27 pm

        Dear Nalo,
        I am partnered with other private lenders, not a company. We operate as individuals or as partners, whichever works best for the borrower and the project.
        Best to you, Laurie

  8. Curtis Stohr Jr December 27, 2012 at 8:47 am

    I am part of a group of Private Lenders, who have a lending program that is working very well with Rehabbers. We call it our Alliance Program, and it is a cross between a Joint Venture and Hard Money. Simply, we become your funds supplier, giving access to flexible funding solutions, to cover all of your project costs. This way, you focus on property acquisitions, and management, and we focus on funding all of your projects. We too like to stay around 70% of ARV, but when I say flexible we are, and can structure funding to suit each project by using additional collateral, and other methods to secure the funds. This does not imply we are risk takers, and we will not fund any risky projects and we will tell you up front if a deal is too risky. Nothing good comes from taking unnecessary risks, and there are plenty of safe investments to be found.

    • Tony Belliveau December 27, 2012 at 4:15 pm

      Hi Curtis,
      I am in Maine and I like what you have to say about your Alliance Program. I would appreciate your sending me your e-mail address and/or phone number so we could discuss in more detail how we can work together. Your time and effort is appreciated.
      Tony Belliveau
      E-mail tonyveau@yahoo.com
      Cell 207-314-2088

    • Alicia December 30, 2012 at 6:02 pm

      Curtis, I am interested in the Alliance Program. Please provide more info. I’m at aliciapugh.realtor@gmail.com.

    • Deborah and Glenn Cooper January 2, 2013 at 1:04 pm

      Hi Curtis, I am in N. VA. and I do have need for private investors from time to time. Would you please email me or call me about your investment co. and your terms. Thank You.

    • Adriana B. Guerra March 19, 2013 at 11:30 pm

      Hello Curtis. Thank you for your info. I am very interested in learning more about Alliance Program. I am interested in Rehabbing for I am an architect. I am just learning as well and would like for you to email me at yuyi121@aol.com at your earliest convenience. Thank you
      all for all the great info.
      Adriana B. Guerra

  9. Polly January 15, 2013 at 8:38 am

    Very detailed article. It is always a good thing to know other option when you need money in times of needs and in this kind of situation a hard money lender is the answer to your problem. You just have to look for one near your area and inquire about their services. Thanks for setting some examples also.

  10. Cindy Harris January 27, 2013 at 5:15 pm

    Several of you have asked for a local hard money lender for where you live. Besides talking to lenders, attending your local REIA, and talking to other investors there is a great source some of you may be missing. As a mentor I always interview title companies, escrow officers or attorneys that handle closings. There are several questions that will be asked. If my student wants to wholesale we will talk about that. If my student wants to understand how foreclosure works in their state we can learn the process from them. If my student hasn’t a power team in place they are a source for great referrals. And one important member of our power team is a hard money lender. So, depending on the state you live in, get out and talk to the attorney, a title company or an escrow company that handles closings where you live and find that hard money lender you are looking for along with other members of your power team. I also noticed that a couple of you are hard money lenders. That’s great! Some of you have already used hard money. It was great to read the recommendation that you crunch your numbers carefully when doing a rehab. Too many people forget to factor in all the costs. If you haven’t had your mentor out yet and are thinking about using hard money it may be time to schedule your mentor.

    Cindy Harris
    Mentor
    • • •
    What’s Stopping You?
    ���
    Rich Dad Education, LLC

  11. The Boyd Capital Group March 3, 2013 at 7:33 pm

    Do you homework on any lender, ask for references and please confirm they got funding.

  12. Rosana April 9, 2013 at 7:26 am

    Probably most of the people even real estate investors are not familiar about hard money loans. The post explains about hard money loans in clear manner. Thank you.

  13. toby May 6, 2013 at 10:35 am

    very inspiring write up, but what other deals can be financed using hard money beside real estate.Thanks.

  14. Korey May 16, 2013 at 7:11 am

    Online payday loan businesses that require credit report checks typically
    have lower rates of interest, therefore the raise your credit the greater that rate can decrease.
    As of now, lenders in the monetary market are selling loans for
    bad credit.

  15. titleloansflorida August 20, 2013 at 5:06 pm

    I’m really enjoying the rich dad education so far. I just had one quick question for you. I read threw the comments but couldn’t seem to find the answer, maybe I missed it. As opposed to other types of loans how hard is it to get a hard money loan. Since you said they don’t seem to care so much about you as a borrower, I’m assuming it’s easier than other loans? Could you please elaborate on this?

    • Rich Dad Education August 21, 2013 at 11:55 am

      Hard Money loans are based on the property rather than the buyer. They range in interest rate and loan to value. You need to plan on paying a higher interest rate for the money. However, if you calculate the higher interest rate into your offer, you will be fine. You also need to find out how much out of pocket you will have as teh buyer. Some hard money lenders are willing to finance based on the ARV, while others finance based on the purchase price. Hard Money loans are typically short term loans so you want to use them on properties that you will be rehabbing and then selling quickly. Start by networking with local hard money lenders.

  16. johnhester May 9, 2014 at 9:07 am

    At this time hard money loan is more popular in U.S.A. Hard money loan is the best option for anyone who wants to take loan.It is also better than bank loan.When we apply for a loan from bank they want to know our income,tax etc and also they will verify on those information .But on the other hand ” hard money loan”. There is no condition as like bank.This is provided with simple condition.”LendingUniverse” is one of the best web site for hard money loan.About 10000 hard money lenders are there.Most of them are registered.

  17. woodtimeline July 3, 2014 at 5:10 am

    Hard money loan is a kind of loan which is considering as the last resort of financing. Anybody can get hard money loan even if he has credit and income information also.

  18. Stella January 16, 2015 at 12:39 am

    floridaforeclosurecleanoutteam January 15 at 12:15
    That was a pretty good article on hard money loans, but I want to become a hard money lender. Any tips on becoming a hard money lender.

  19. sandyslagle January 26, 2015 at 2:16 pm

    Do you have a Hard Money Loan Contract Document you like that you would recommend. Especially one that would protect the lender should the lendee fail to make payment. Could you forward a link.

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