Hard Money Loans -
What Are They & How To Use Them

If you're new to Real Estate investing, if you are like most others, one of the biggest obstacles to your success will be lack of access to capital. Real estate is a capital-intensive business, and as such, requires a constant source of capital constantly coming in to grow your portfolio and increase your velocity.

Hard money is a broad-term used by industry professionals to describe a class of short-term, asset-based loans used by real estate investors to purchase, rehab, and either sell or refinance before a balloon payment is owed for the balance of the loan. These loans cannot be used to purchase owner occupied properties, and they will only lend to a legal company (LLC, Corp, etc.). This means if you are doing deals under your own name and don't yet have an entity established, you wouldn't be eligible to use a Hard Money Loan.

If, however, you are doing deals under a company, you may be eligible, even if you have no experience!

So what does a hard money loan look like?

While there are many different hard money lenders, each with their own particular requirements, there are some common characteristics among them that you can expect to see. These include:

• An interest rate that will be substantially higher than the bank. This is because of the high risk nature of the loan.

• Require a downpayment of 10-20% of the purchase price

• Typically interest-only payments during the life of the loan

• A balloon payment for the principle balance due at closing

• Short terms - from 6-12 months, some up to 24 months for larger projects

• Require the use of the Asset as collateral

  • Can use other assets as collateral as well (Cross-Collateralization)

What Does the Process of Getting a Hard Money Loan Look Like?

Hard money loans, like most other loans, are all about documentation. While most other loans require a lot of information about you, and less about the collateral, asset-based loans like Hard Money are highly concerned about the value of the underlying asset.

The process starts with an investor successfully negotiating a property into contract. Only once you are under contract can you apply for a Hard Money Loan.

There area two ways to get hard money loans - By going through a broker, or by shopping around for yourself.

The benefit to a broker is their network and experience. A broker will have several lenders to choose from, and should compete these against each other for your business if it is a good deal.

Irregardless of which route you take, you will need to complete a scope of work. This will detail the work involved in your rehab budget, and will also put together figures for calculating what the rehab budget will be. Don't do this blindly. If you are not comfortable with these values, work with a contractor or someone who does have experience to ensure that these numbers are as correct as possible.

After the Scope of Work is submitted, the hard money company will order a BPO (Broker's Pricing Opinion) which is similar to an appraisal.

Once the BPO comes back and all documents are submitted to underwriting, it's time for them to come back with their decision, and hopefully fund your loan!

This process can take 2-3 weeks, and is much quicker than a conventional mortgage would take to close, but is still not as fast as a completely cash-based closing with no underwriting requirement.