Real Estate Innovation

7 Hard Money Loan Basics

Hard Money can be a fast way to fund everything from residential property, to industrial facilities to new home construction. I will not get into every aspect of hard money but I will offer you a general frame work that your imagination can grab a hold of.

First of all a majority of hard money banks let you to finance up to 65% of the value of the property. If the loan is for rehab purposes, the lender will use the “after-repaired value” of the property as the basis point. I have seen on occasion that went as high as 75% but 65% is the norm.

These loans are very situational and very flexible so there is a lot of space if the deal makes sense. It could be a set back if you are new to the game but fortunately that can usually be offset with sufficient reserves and a good plan of action.

Let’s look at an investor rehab loan to visualize how the numbers work.

Let’s say you came across a beat up old house in a good neighborhood where homes sell for $100,000. The seller takes you through the home and you determine that the property needs approximately $12,000 in repairs. You have gotten pre-qualified for a rehab loan and want to know what is the maximum you should pay for the house.

Lets keep it simple for starters, you will want to take $100k x 65% - loan costs - repair costs/holding costs = Purchase price. Loan costs, for hard money loans, run from 8-13% of the total loan amount. They are not inexpensive but it’s less money than you’ll disburse to a partner! For now we will assume costs of 10% and holding costs of $2,000. Given those numbers, you probably shouldn’t invest more than $45,000 for the property. If you pay more, that will equate to more money out of your pocket to complete the project.

Here are a few quick tips you can utilize to maximize the likelihood of getting approved for hard money loans, in general:

1. The more equity in the property after the loan, the better, 2. The higher your credit score, the better 3. The more credit history you have, the better! 4. The more liquid assets you can prove that you have personally or have guaranteed access to (lines of credit, partners, rich uncles. . .) the better 5. The more populated the area, the better 6. The faster the properties in the area sell, the better 7. The more solid the appraisal value, the better! Most hard money lenders like to use fire sale values as the basis point of the loan so don’t be surprised. This is definitely not the time to use stretched values.

All in all, this is a numbers game. Don’t get attached to a property if the numbers don’t make you money. Hard money lenders can be flexible but bring them a deal where the numbers don’t add up and it could cost you a crucial relationship for future investments. Credit doesn’t always matter but it does help, tremendously, if you can show good credit history.

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