WHAT IS A HARD MONEY LOAN AND HOW DOES IT WORK?
A hard money loan is a loan from a private lender instead of a bank. The terms of a hard money loan are much different from a typical mortgage. On a traditional mortgage you might get a rate today of around 4% for a period of 15, 20 or 30 years. With a hard money loan the rate is generally between 10% and 14% and you generally have one year to pay it back.
Sounds steep doesn’t it? It really isn’t. Rates are very low right now. My first mortgage was 12.25% from a well known major lender many years ago. Rates are around 4% now.
The reason that you might want to use this type of loan instead of a traditional bank loan to finance your buy is that there is no credit or job required.
Let’s say for the sake of illustration that you want to buy a property to generate income but you either have poor credit and you wouldn’t qualify for a traditional mortgage or maybe you might have good credit but you already own a home and you want to finance an investment property and a second mortgage is unworkable on your budget.
A hard money lender will put up 75% of the purchase price and up to 100% of the rehabilitation cost. You only have to put in 25% of the finished project.
The property you are buying must be investment property, not a primary residence for yourself. For business and tax purposes you will need to form an LLC. It is easy and inexpensive. I have several local attorneys that can provide this service.
Let’s say we find a property that that you can buy for around $125,000 and repairs and remodeling will cost another $75,000.00 but when completed will have a value of around $250,000.00.
Your total cost to buy the house and complete the renovation is $200,000.00 so you need 25% of that amount, or $50,000.00 The hard money lender puts in the other $150,000.00. You hit the ground running on day one with your permits pulled, all of the contractors ready to go and you have to see the project through. Hiring a general contractor is smart if you aren’t experienced.
Your goal is to finish the project in three months or less because you are paying higher interest on the loan than you want to. The sooner you finish, the lower your costs.
At completion you go to your local credit union, bank or lending institution and take out a mortgage on your newly renovated property. You only need enough to pay the hard money lender back. The bank will be happy to give you a mortgage for that amount because the house is now worth $250,000.00. You immediately have equity in your property. A house flipper would sell the property at this point, not refinance.
If you have a project in mind, I have a hard money lender on speed dial.
Think big.