Finding a hard money lender is not a difficult task. A Google search for hard money lenders will turn up about 1,000 results. The tough part is finding a hard money lender that has reasonable rates, lends in your local market and is experienced. Many hard money lenders charge over 15 percent and many others cannot perform when a deal is on the line. I am a real estate agent as well as an investor and I have seen multiple deals fall through because a hard money lender dropped the ball.
There are great hard money lenders out there, but they are not always easy to find. There are a ton of companies that call themselves hard money lenders and most do very little lending. Most hard money lenders are also localized to one state or even one area of a state where they know the market. However, there are some larger hard money lenders that work in many states and have lower rates that a typical hard money-lender may have.
How does a hard money loan work?
Hard money loans are not loans from a bank. In a hard money situation a company (hard money lender) borrows money from investors and then lends that money to other investors looking to buy real estate at a higher rate. The investor who lends money to the hard money company wants to see a pretty hefty return, because of the risk. The hard money lender than has to charge the real estate investor a very high interest rate to make any money.
With a typical hard money lender you will see rates in the 14 to 18 percent range, plus they will charge from 2 to 5 points on the loan. Points are a percentage of the loan amount and added onto the loan amount. A 5 point fee on a $100,000 loan would be $5,000. Here is a great article on how the number would look on a hard money loan.
Why would real estate investors pay so much in interest and fees on a hard money loan?
The reason investors are willing to pay such high rates on a hard money loan is that they have no other choice. It is very hard to get short-term financing from most banks and that is what hard money is for. Usually a hard money loan is good for 6 months to one year, where bank loans may be good for 30 years. Many hard money lenders will also let investor put less than 20 percent down on properties where banks will not. So while paying 15 percent interest is not ideal, it may be the only choice for many fix and flippers who cannot get other financing or anyone looking for a short-term loan.
How can you find cheap hard money lenders?
While many of the smaller hard money lenders will charge 15 percent or more, there are some larger companies entering the lending scene that are more affordable. The reason these companies can charge less to the real estate investors is that they are getting their money from large hedge funds who do not require as high of a return as the smaller individual investor. Many of the larger hard money lender will have rates as low as 11 percent with 2 to 4 points. Getting below 12 percent with any hard money lender is going to be very difficult. Below are hard money lenders that lend in multiple states and have very good rates for hard money.
How do you find local hard money lenders?
If you prefer to work with a local hard money lender I would be very careful who you deal with. Referrals are always the best way to find reputable business partners. Here are a few ways to find some hard money lenders.
- Ask around at a local real estate investor meetup. Many times hard money lenders will sponsor and speak at the meetings.
- Ask your real estate agent or a lender if they know of any hard money lenders. There is a good chance they may not know any, but it does not hurt to ask.
- Check with online real estate investing communities like the Invest Four More Forum.
- Search online, but be very careful! We had a hard money lender who a buyer was using on a HUD deal recently and they could not provide a proof of funds to show they had money to lend the buyer.
How much more money will hard money loans cost you?
Banks do not like to loan on fix and flips, because they can only charge interest for a short period while you own the house. If you can find a bank to finance a fix and flip, they will most likely charge a higher interest rate and more upfront costs than they would on a long-term loan. I have a great relationship with my portfolio lender and they charge 5.25 percent and 1.5% origination fee with 75% loan to value ratio on my fix and flips. This is a fantastic deal and I was able to get it because of my long-term relationship with the bank and my flipping history.
Hard money lenders will charge much more than my bank, but like I said most flippers do not have cheap bank money available. With a higher interest rate and origination fees here are what the cost differences would look like on a flip held for 6 months that cost $100,000.
$75,000 bank loan
Origination charge: $1,125
Interest over six months: $1,969
$90,000 hard money loan:
Interest over six months: $5,400
As you can see it is much cheaper to use bank money, but you will be able to finance more of the purchase price and repairs with hard-money. While it will eat into your profits to use hard money, it is better than having no profits at all or only being able to flip one house at a time using all cash.
Hard money can be a great way to flip houses and increase your returns when flipping by using less of your own cash. Hard money can also be used to purchase rental properties and then be refinanced, which I explain in this article. Finding the right hard money lender can be challenging and if you use the wrong one it can cost you deals.