112: How do Hard Money Loans Work with Dan Leyden

Hard-money loans are a great option for real estate investors who want to flip houses. However, there are many different types of hard-money lenders and many different types of hard-money loans. In the past, hard money was extremely expensive, but competition in recent years has driven the cost down. On this episode of the InvestFourMore Real Estate Podcast, I talk with Dan Leyden, who is a founding partner of Asset Based Lending. Dan talks about the different types of hard money available, including rates, terms, how to finance repairs, and who can qualify. He also talks about his company and how they lend hard money.

What is hard money?

One of the biggest challenges in house flipping is finding a lender who will finance the project. Most banks will not offer short-term loans for flips. Some local banks may lend on flips, but they tend to lend only to experienced investors they have a relationship with. Hard-money lenders specialize in short-term financing. A hard-money lender is a company that either uses their own money to lend to flippers, or they borrow money from other investors and then lend it to flippers at a higher rate.

Hard-money loans can have high interest rates and origination fees, but they also offer the ability to finance repairs and the purchase price. In some rare cases, a hard-money lender may be willing to finance all the costs, but it will be expensive. Usually, hard-money lenders will finance from 80 to 90 percent of the purchase price and 80 to 100 percent of the repairs. Rates can vary from 8 to 15 percent, and the points can range from 1 to 5 on different deals. The more money the flipper puts into the deal and the more experienced they are, the better the terms will be.

When a hard-money lender finances the repairs on a property, they do not give the flipper all the money up front. They will use what are called “draws” to pay out money as work is done. The hard-money lender will hire someone to inspect the project to make sure a certain amount of work is done, and then they will pay the investor. In most cases, the flipper pays interest on the money set aside for the repairs, even if they have not used it yet. Some hard-money lenders will charge interest only every month, and a few will wait until the flipper has sold the property to collect interest and fees. Most hard-money loans have 6 to 18 month terms.

How did Dan Leyden get into the hard-money business?

Dan started out in Wall Street but was never a huge fan of investing in the stock market. He hated having no control over the companies he invested in, and decided he would invest in real estate instead. Dan invested in tax notes in New Jersey and also pooled money together with other investors to invest in rental properties.

In the mid 2000s, Dan was in charge of a 2 billion dollar hedge fund, which did not do very well during the financial crisis. In 2009, that hedge fund closed and Dan’s partner started to flip houses. His partner did not do well, but he realized there was a huge need for fix-and-flip financing. In 2010, Dan and his partner started Asset Based Lending with 2 million dollars of their own money and a 1,000-square-foot office.

ABL has grown to over 276 million in hard-money loans. Dan talks about how ABL is different from most hard-money lenders because most of the money they lend is their own or comes from direct investors. Many other hard-money lenders use borrowed money and sell their loans to Wall Street investors. ABL offers rates from 9 to 12 percent and charges 2 to 3 points per hard-money loan.

How can you get a loan from a hard-money lender?

Many hard-money lenders and banks only lend to experienced investors. However, ABL works with new flippers. Dan outlines the type of investor they look for. They want someone who has experience, decent credit, and some cash available. The property also needs to be a great deal. However, finding those investors isn’t always easy, and if you do not meet those criteria, they may still lend to you. Be sure to listen to the podcast to hear Dan’s full explanation of who they will lend to and when. ABL will lend 80 percent of the purchase price and up to 100 percent of the repairs, as long as the total loan does not exceed 65 percent of the after-repaired value.

You can find out more about ABL on their website. They love to help flippers learn since they are in the business to make money on loans and not foreclose on properties.