Last Updated on August 22, 2019 by Mark Ferguson
Hard money is used by many investors as a short-term solution to fund real estate deals. Hard money can be used to fund fix and flips or buy rental properties until long-term financing can be put in place. I fix and flip homes as well as invest in long-term rentals, but personally, do not use hard money. When you use hard money it is usually more expensive than traditional financing and I have other short-term financing in place. Hard money is still a great option for many investors, but I will also discuss other short-term financing options. There is also a way to use hard money or private money to buy rentals with no money down using a conventional loan refinance.
What is a hard money loan?
Hard money is a type of financing used to finance properties for a very short-term like 6 months or a year. Hard money-lenders use different terms than a traditional bank. The first thing you will notice when you finance with hard money lenders is they charge a very high-interest rate. Most hard money-lenders are charging 10 to 16 percent and points for their money. Points are a percentage of the total loan and can add costs quickly when a hard money-lender is charging 2, 3 or even 4 points on a loan. Hard money loans are typically used for fix and flips because they usually have a one year term.
Why would investors use hard money to finance a rental property?
The advantage of a hard money-lender is they may loan the entire amount of money you will need to complete a deal. Most hard money lenders base the amount of the loan on the after repaired value or ARV. You may hear they will loan 65 or 70 percent of ARV; that is not the purchase price, that is how much the house will be worth once you fix up the home. With a hard money loan, a rental property could be financed with much less money down.
How can a hard money loan be refinanced on a rental property with no money down?
Here is an example of how one hard money-lender structures a deal. You buy a home for $60,000, the ARV is $130,000 and the lender says they will go up to 70 percent ARV on the property. The hard money-lender will loan up to $91,000 on the house based on the ARV. The hard money-lender will need bids or estimates for repairs, and they will pay out the money for the repairs like a construction loan. They will pay 25% of the repairs needed at closing, and the other payment will come in 25 percent increments as the repairs are completed. The lender won’t charge you any interest or points until you sell the home and then you pay them one large payment for the loan principal, interest and points. This particular hard money-lender charges 15% interest and 4 points, but they will reduce the points paid after you do a few deals with them.
The cost to do this deal with a hard money-lender can add up very quickly. On this deal, the interest will cost you $6,825, and the points will cost you $3,640 if you use the money for 6 months. There are also hard money-lenders that will charge lower interest and points but will want a split of your profits. I don’t use hard money-lenders myself, because of how much they charge, but for investors who have no other options it can work out well. Hard money-lenders can help you secure a property below market value when you do not have other options.
Where can you find hard money-lenders?
There are many hard money-lenders out there. Many only lend in specific states, while some lend nationwide. The best way to find a hard money-lender is to search for one in your state on any search engine. If you want a few companies to talk to, I have listed some hard money-lenders below.
Can you refinance a private money loan on a rental with no money down?
Private money is money that comes from a private person. The person loaning the money is not a bank, mortgage company, hard money-lender or portfolio lender, they are just a person. Regular people will lend money on real estate because interest rates on other secured investments are really, really low now. Have you looked at what the rate is on a CD? For a five-year CD, the average is less than 1 percent! You can’t even come close to keeping up with inflation with that rate. Many wealthy people are looking for a higher yield investment that is still secured. Loaning on real estate may be the perfect answer for them to increase returns and create great opportunities for investors. A private money loan can be used in the same way a hard money loan is used.
How do you find private money for a rental property?
The biggest problem with private money is finding the person to lend you private money! There are many websites that claim to have private money lenders they can connect you with for a small fee. In my experience, those websites take your money and connect you with a hard money-lender at best. A real private money-lender wants to lend their money to someone they know and trust. They don’t want to lend money to a complete stranger who may or may not be trustworthy and do not have a clue what they are doing. I am still trying to find a source for good private lenders, but I think I am limited to one option; people I know. I use private money from many sources who want a better return on their money.
How to buy a rental property with no money down using hard money
It is possible to buy a rental property with no money down using hard money. If you were to finance with a hard money loan and finance repairs as well, you can refinance the hard money loan with no seasoning period according to Fannie guidelines. Fannie guidelines do not allow a cash-out refinance without a seasoning period, but the home has a higher loan than the original purchase price because the repairs were financed. You can get a long-term loan to replace the hard money loan without waiting a year like you would with a cash-out refinance.
For example, if you buy a home for $100,000 with hard-money loaning 100 percent of the purchase price and financing $35,000 in repairs. The total loan is now $135,000, you fix up the home and refinance using a Fannie loan, which will loan up to 75 percent of the new appraised value. If the appraisal comes in at $185,000 then you could finance up to $138,750, but Fannie guidelines will not allow a cash-out refinance. You would be able to refinance the full $135,000 that was loaned to you by the hard-money lender. This technique can be rather expensive because you have to pay the higher interest rate on the hard-money loan, the initial points and then the refinance costs with Fannie Mae. However, you just bought a long-term rental and fixed it up with almost no out-of-pocket costs!
Using traditional banks to finance short-term loans on rental properties
There are some banks who do short-term loans for investors. They are very hard to find and usually, you must have a great relationship with the bank. We use a portfolio lender to finance many of our short-term investments. They charge around 5.25 percent interest and 1.5 points on our loans. They will only give us 75 percent loan to value on our original purchase price and can complete the loan in two weeks. In the past, banks would finance 100 percent loan to value and fund us the same day. I am afraid those days are gone forever.
Traditional banks can offer another short-term option in the form of lines of credit. Most banks will want collateral in the form of real estate to issue a line of credit. If you have a house with equity in it, you should be able to get a line of credit from your bank. My bank charges a 5 percent interest rate and will go up to 90 percent loan to value on my personal residence or 80 percent on an investment property.
I use a mix of traditional banks, lines of credit and private money to fund my deals. I am lucky that I have private money available and cash to complete a lot of deals. I will usually get the bank loan for 75 percent of the purchase price, use private money for the rest of the down payment and my own money for repairs. Don’t be afraid to finance real estate with hard money if that is your only option.