Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Is It About Time You Considered Using Hard Money?

Written by JD Esajian

One of the most common hurdles for new investors is finding money to fund their deals. While this can be a struggle at times, it is currently easier than ever to find the capital you are looking for. Between lines of credit, private lenders, retirement funds, credit cards and traditional bank loans, there are numerous options available to those that know where to look. The key is to find a funding source that works for you. Often times, that source will be a hard money lender. Hard money has gotten a bad rap over the years, but has proven to be a reliable way to fund deals. If you don’t have a hard money outlet or have yet to use one, now may be the time for you find as much information on them as possible.

A hard money lender is an individual or group of individuals that lend money on their own terms. They put stock in the property and the real financials of the borrower more than anything else. With traditional lender financing, if your credit score falls below a certain threshold you may have trouble getting approved regardless of other factors. However, hard money lenders have their own set of criteria . For this flexibility, there are more fees and higher interest rates to deal with. Some investors will balk at those opting for lower rates that banks offer. This can work on certain properties and deals, but you need to be able to act quickly on those that are time sensitive, and that’s exactly what hard money allows you to do. Here are just a few of the benefits of using a hard money lender:

1. Speed: In today’s real estate landscape, how quickly you can close is often more important than the amount you offer. Too many lenders have been burned in the past waiting for deals to close that never do. Even if they do close, the average length of a financed transaction is approaching 45 days. Most sellers would rather take a slight discount with the assurance they can close in a week than to risk closing in 45 days. This speed gives you the ability to make offers with five or seven day closings. On borderline deals, you can bet that your offer will be the one that is accepted.

2. Volume: Instead of waiting 45 days to start working on the property, you can cut the time down to just a few weeks. Shaving a few weeks off every rehab project you start gives you the opportunity to close more deals over the course of a year. Adding just one or two deals to your portfolio will increase your bottom line exponentially. Often times, you may be able to close two or three times the volume you closed the previous year. When the amount of deals you complete starts to creep upwards, so will the amount of contacts you make. The people you meet are just as important as the deals themselves, if not more so. Remember, real estate is a people business. The more deals you do, the more contacts you have the opportunity to make. In turn, those contacts may even lead to more deals.

3. Quality: Having capital to close is only part of the benefits that coincide with hard money. With hard money in your corner, you have the opportunity to do whatever needs to be done for the property. Instead of cutting corners to save money, you can do the work that you know needs to be done. This will help you maximize your bottom line and improve your reputation in the industry. Realtors and fellow investors that see your finished products may want to work with you down the road. Quality will also help get your property sold to end buyers much faster. Instead of hoping that an offer comes in, you will have your choice of deals to choose from.

4. Bigger Projects: Increased capital allows you to slowly build your way up to bigger projects. Instead of looking solely at single-family properties, you can start to look at multifamily and commercial deals. Furthermore, closing more deals will increase your personal capital and give you a larger share on bigger deals. There is nothing wrong with sticking to condos and single family properties, but having hard money behind you gives you to opportunity to explore other options that come your way.

Aligning yourself with a hard money lender doesn’t mean you have to use them on every deal. A property that you want to buy and hold may be better served with a long-term interest rate around four percent. However, most rehab projects need the efficiency that hard money brings. The ultimate goal should be to save some capital from every deal until you have enough saved to fund them yourself. Until you get to that point, you may have to make a little less per deal to increase your bottom line.

The biggest knocks on hard money are the high fees and points. These accrue from the time of settlement until you can sell the property. In some cases, it can span several months. However, it is a small price to pay for what you get. The annual interest over just a few months is a relatively small factor compared to all the other expenses you will incur. Additionally, you only pay these on deals you close. If you can’t close, you can’t earn, and hard money helps you close more deals. It is not for everyone on every deal, but should be a part of your financing options.