For many investors, they think that hard money lenders are loan sharks. What most that have never dealt with a hard money lender don’t understand is the reason for our pricing and where we fit into the market.
- Banks don’t lend. Don’t fool yourself thinking that they do. Show me a local bank that can fund your rehab in 10-14 days.
- Do you have credit issues? If so, you have no shot at a bank loan.
- Do your taxes not show enough income? Is your debt to income ratio too high? If so, your bank won’t even talk to you about a loan. Hard money lenders can overlook issues that banks simply cannot.
- Speed – Are you planning on getting an FHA 203k loan. Good luck with that. You have a 15-30 day purchase contract do you really think you will get an FHA loan closed in 15-30 days?
- Seasoning – did you just purchase and rehab a property and need to refinance to pull cash out for your next deal? How about to pay a local private investor off?
- Do you have more than 4 properties on your credit report? In Feb 2009 FNMA upped the limit from 4 to 10 properties in efforts to stabilize the housing market. Good luck finding a bank that will allow you to finance the 5th property. Most banks are still sticking to the 4 property guideline. (Have you seen our soft money program? We allow up to 20 properties!)
- Stabilization – do you have a commercial property that is not stabilized? Your DSCR (debt service) just won’t cover the payments? Try and get a bank to lend you on that property! Hard money lenders lend on the value of the collateral and not the debt service.
While many investors look for “Private Money”, those of you that are using it know the limitations. You might have a rich relative that believes in your business model and lends to finance your deals, or a local lender that will take what he considers a good return on his money, but those funds are limited to whatever is in their bank account. If you don’t have a rich relative or have a stable of private investor in your Rolodex, you need to get out there and pound the pavement and raise money. Those that are doing this know it is not as easy as those real estate courses lead you to believe. Most hard money lenders are actively raising capital or are drawing from lines of credit, warehouse lines, or getting cash infusions from larger funds. With the constant inflow of money, having a relationship with a hard money lender is vital to any active investor.
Hard money is a bridge loan from the rehab stage to the completion stage in most cases. There are so many investors that lose a good deal because they don’t think they should pay hard money rates. That is just absurd. You would rather lose a good deal than pay 10-15% and a few points? Remember, when you talk with a hard money lender and get quoted a “rate”, this rate is usually for a 12 month period. If you believe you have a 6 month project on your desk, and you are quoted 12% and 4 points, your actual cost of money is 10% for the 6 month period.
In summary, hard money lenders serve their purpose in the real estate investing market if you know how to use them correctly. To read more check out this article