New to Real Estate Investing? HARD MONEY 101

 

By: Victoria Forte (VP, Marketing @ Alpha Funding Solutions) | January 30, 2018

A few months ago, I started working for a Hard Money lender (HML) based in New Jersey. While I’m very familiar and could probably be labeled as “obsessed” with HGTV, I never really understood how it all worked until working with Alpha Funding Solutions.

With the ever changing financial market today, many people have a difficult time choosing the best way to invest their hard earned money. Some think investing in Bitcoin or other stocks are the way to go, but what if there was a better way…a safer way to invest your money.

Investing in real estate and flipping houses can be a very lucrative route for building your own capital. Hard Money can be a huge asset in helping you get started. I assumed that the concept of hard money would be a bit complicated or “hard”, yet I was extremely wrong.

What is a Hard Money Loan?

Let’s start with, what is a Hard Money loan? In layman’s terms, a hard money loan is a short-term lending solution to quickly purchase and rehab either a residential or commercial property. Typically, these properties would be flipped and sold at a higher price than you purchased it for, for a profit. However, some investors may hold the property and use it as a rental property and transfer to a longer-term permanent loan solution once the terms of the hard money loan are up.  Hard Money lenders lend based on the value of the property itself, they focus on the ARV (After Repair Value), which is the estimated value of the property once it’s rehabbed. Hard Money lenders aren’t as focused on your credit score like most traditional bank loans are, making hard money easier to access for most people.

Now that we know Hard Money loans are short-term, I’m sure most people would be worried about higher interest rates and higher fees.  So while that might technically be true, there are certainly huge benefits of using a Hard Money lender that really put those two things into perspective. So let’s just take a quick look at the benefits:

SPEED:  Because Hard Money lenders are more interested in the value of the property than they are interested in your credit, they are able to close loans faster than traditional lenders. They can typically close within 7 – 10 business days and sometimes sooner.

FLEXIBILITY: Now every deal is different, which allows Hard Money lenders to be more flexible than traditional bank lenders. As for Alpha, there are a few factors that are considered in the underwriting process.

  • One, the numbers need to add up. For instance, you want to purchase a single family home in need of work for $150, 000. You want to put in $65,000 of work, you expect the ARV to be $315,000 and you want to put down 10% of the purchase price. The Hard Money lender will typically fund up to 90% of the purchase price and 100% of the rehab – for a typical Fix & Flip. Looking at those numbers alone, the deal looks great. The LTV (Loan to Value) on a deal like this would be about 63% which gives both you and the HML a great ROI (Return on Investment).
  • Second, typically the underwriters want to get to know you as a borrower, build relationships, and understand the deal and what your exit strategy is.

After looking at these factors, your Hard Money lender will piece together all of the nuances of the deal and will put together the loan terms and repayment schedule. Your Hard Money lender should be giving you the best leverage possible.

EXPERIENCE: Your Hard Money lender can become more than just a financing solution. Most HML have been in the business for many years and can really become more of a partner to you. Especially if you’re new to flipping, your Hard Money lender can really be an asset in terms of recommending different vendors to help you build your team for success. Additionally, your HML is familiar with the real estate market and can help guide you to the right areas for investing and can help introduce you to other investors, which can really help long-term.

So with these benefits, to me…it’s a no brainer. It’s a Short-Term loan so you will be paying Short-Term. It’s quick, easy, reliable, and can really make a difference in the long run. Now go get funded and give Chip and Joanna a run for their money!