Often times, when I talk to a novice investor or even a somewhat experienced investor, I hear, “I want to do a flip or buy a rental but I don’t have enough cash in my IRA and the bank won’t finance me…”.
The easy solution to this common problem is ‘Hard Money’. The following response I often get is either ‘what is that’ or ‘I heard they charge insane rates and are too expensive! The truth is, Hard Money is not as bad as many people think.
I’ve closed at least 50% of my deals using Hard Money and every one of my buyers who’ve used it is satisfied with the strategy.
Well, what is Hard Money?
Hard Money is also called private money. The funds don’t come from a bank, rather they come from private individuals who lend their money. Often times this private money is coming from their self-directed IRA. These private lenders don’t have as stringent regulations as banks do so it’s easier to get the loan. The drawback? They charge a higher interest rate than banks do. That’s true. The lenders here in Orlando are charging 12-14% interest. That’s high, but not anything like the 18% interest homeowners were paying back in the 1980s for their own home!
So how can someone use hard money to help leverage their money?
Let’s analyze the benefits of using Hard Money using a recent deal of mine as an example:
The home was a 4 bedroom, 2 bath home for $155k. The After Repair Value (ARV) was $270k, but it needed $45k in repairs. Now, if you used all cash, you would need $200,000…CASH!!! Not an easy feat.
Now let’s take a look at the deal using hard money:
The hard money lender has the following terms: 3.5% loan origination fee, 12% annual interest, 20% of purchase and rehab cost for down payment and loan up to 65% of the ARV. So, let’s break it down with a purchase price of $155k and rehab cost of $45k. The origination fee is $5,600 and the down payment was $40k. So, to purchase this home you would need $45,600.
What about holding cost for the loan and closing fees?
This lender only charged $900 in total additional closing fees and holding it for 6 months would be $9,600. So, to purchase this home and rehab it with Hard Money, you would only need a total of $56,100. Now, that’s a big difference between sleeping soundly at night and closing a deal by the skin of your teeth, if at all.
Even better than only having to use $56k to purchase and fix the home, is the fact that once it’s SOLD, my investor is looking at a NET profit between $35,000-$40,000. That’s almost a 75% return on his $56k in 6 months or less! That’s compared to buying the property all cash which would have resulted in only a 20% return. Talk about leveraging your money!
CHRISTIAN MARIN / Broker & Co-Founder
Capital Real Estate Professionals, LLC.
