Hard money is used mostly by investors as a short term solution to fund real estate deals. Hard money is an excellent option that is used to fund fix and flips or buying rental properties until long term financing put in place.
What is Hard Money Loan?
It is a type of financing used to finance properties for a short term period of six months or a year. Hard money lender use a different terms than the traditional lenders such as bank. Most lenders charge 14 to 16% and points for their money. Points are percentage of total loan and it can add costs quickly when a lender is charging 2-3 or even 4 points on loan.
Why Investors use Hard Money to Finance Investment Property?
The main advantage of a hard money lender is that they may loan the entire amount of money you need to complete a deal. Most lenders base the amount of loan on ARV (After Repair Value). You would have heard that they can loan 65 to 70% of AVR; which is not purchased price i.e. how much home will be worth once you fix the home.
How hard money deal is structured on investment property?
Let us take an example of how one hard money lender structures a deal. You have bought a house for $60,000 having AVR $130,000 and the lender says they will go up to 70% AVR on property. The lenders will loan up to $91,000 on the house based on the AVR. The hard money lender requires bids or estimates for repairs and they will pay out money for the repairs such as construction loans. They will pay 25% of the repairs required at closing and other payment will come it 25% increment and 4 points, but they will reduce the points paid after you do a few deals with them.
The cost to close this deal with a California hard money lender can add up rapidly. The interest on this deal will cost you $6,825 and the points will cost you $3,640 if you use the money for 6 months period. There are lenders that will charge lower interest and points, but will want a split of your profits. Hard money lenders can help you secure a property below market value when you have not other options.