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Is Hard Money Really that Scary?

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Services for Real Estate Pros with Heaton Dainard

 

By James Dainard
Intrust Funding LLC

 

People often get nervous when they hear the term or phrase “hard money lender.” Many people have misconceptions about what an actual hard money lender is. Hard money is not a scary thing; it is an opportunity cost for investors. It allows investors to leverage their money and increase the underlying ROI (return on investment).

What is a hard money loan?

A hard money loan is a non conventional loan where the borrower is given funds in exchange for collateral on a parcel of real estate. A hard money loan is typically secure by a promissory note and a deed of trust secure by the subject property. In addition, it is not uncommon for a hard money lender to have the borrower personally guarantee the note. Typical note amounts are short term – from 6 months to a few years. These loans are not made for long term purpose.

When to use hard money and when not to.

Hard Money is designed for investors that need quick cash in order to secure an opportunity that has time constraints on closing. For example, if a investor wants to purchase a foreclosure property at the court house steps, they MUST have cash in hand to purchase it. Hard money is designed for investments purposes not for homeowners that need to be bailed out of a bad scenario. It is not a band aid for a problem rather a bridge loan for you to capitalize on a investment.

Isn’t the cost of Hard Money outrageously expensive?

Yes, hard money is more expensive than conventional lending. However, it is an opportunity cost that allows you to purchase properties at a greater discount that other conventional lenders won’t finance. It adds strength to your purchasing power and can help you get a better deal. For example:

If you can purchase a property for $200,000 at a 30% discount because you have cash in hand to purchase it you would save $60,000 immediately on a purchase. If the average cost of hard money is 3 to 4 points, you will essentially be paying $5,600 ($140,000.00 x .04) in cost to save $60,000.

Advantages of Hard Money and Why You SHOULD Use It

Leveraging your cash and utilizing hard money loan for a real estate purchase can be very profitable to any investor. One of the biggest strength of hard money is that it can help you close your purchase quicker than traditional loans. Some hard money lenders, such as Intrust Funding LLC can fund your transactions in as little as 24 hours with no appraisal, inspection, and lighter underwriting requirements. Conventional lenders will require a full credit report, income documentation, and asset verification. A hard money lender is more concerned with the property it is lending on rather than credit score.

INCREASE YOUR Cash on Cash Return and profit.

One of the reasons investors use hard money is to leverage cash and increase their overall cash on cash return. Cash on cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. Meaning, how much cash you put in and how much cash you get out.  For example, lets say a you have $100,000 to invest in real estate.

If you purchased a property for $80,000 and put $20,000 into fixing it up you would be into the property for $100,000. If you sold that property for $150,000 in 3 months and had selling cost of $15,000, you would have a profit of $35,000 – a 35% cash on cash return.

If you’re borrowed at a scenario of 4 points and 12% interest and had to put 20% down. The points of $3,200 ($80,000 x .04) will be rolled into the loan.
Cash down: $20,000
Fix up: $20,000
3 Months of Interest: $3,000
Total Cash in: $43,000
At a sales price of $150,000 - $15,000 - $106,200 = $28,800 in profit and a 67% Cash on cash return!

In addition to increasing your cash on cash return, it will increase your total profitability as an investor. Instead of having all your money tied up in one deal, you can diversify your investment capital and do more properties at the same time. If you take the previous example, you would at would be able to invest that money 2.29 times over in 3 months rather in just one deal. Thus, you could make $65,952 in 3 months, rather than the $35,000 by leveraging your cash and using hard money.

Exit Strategies:

When using hard money, one of the most important things to think about is how you’re going to pay off the loan. You always will need to have multiple exit strategies when selling a house. Things to do before you borrow:

  • Prequalify with a mortgage broker to refinance into a permanent loan.
  • Get a schedule of construction and average days on market so you know a rough estimate of how long you will carry the note for.
  • Verify how long your hard money note is for, do they do extensions?

The better the game plan you have, the quicker you can get in and out of the property and the hard money loans.

In closing

The more tools you have the more successful of an investor you will be. Associate yourself with a good reliable hard money source today and increase profitability. Hard money is nothing to be scared of it is something all investors should embrace. It will give you more purchasing power and give strengthen any offer that you put on a property. If you need hardmoney in Washington, Visit www.intrustfunding.com to get prequalified today.

 

QUESTION: Let us know what you think of hard money.  Am I right when I say that it's a scary word for most people?  Share you experiences with us!

 

Comments (1)

Alan Kirkpatrick
Austin Texas Homes - Round Rock, TX
Alan in Austin

Heaton:

Very good post with good information. Thanks for sharing it. Have a great day. 

Dec 05, 2011 07:01 AM