Tag Archive for: Hard Money

Hard Money vs. Private Money Loans: What’s the Difference?

Sometimes these terms are used in similar situations, but what actually makes private money loans different from hard money?

One of the most beautiful and attractive aspects of real estate investing is its accessibility.

Anyone can enter the game and create wealth, provided they understand their available options and use other people’s money (in the form of loans, etc.) to fund their projects. This is called using leverage.

The best leverage for each deal might be a little different. Sometimes you need to close quickly. Sometimes you need to prioritize low interest rates. 

Whatever the top priority, private money and hard money are tools to have in your investing toolbox.

Private Money Loans vs. Hard Money Loans

Hard money loans have been around for a long time, but recently we’re seeing a rise in private money loans.

Knowing the differences between the two can help you find the best deal for the specific needs of your project.

1. Credit Scores

  • Hard Money: Credit scores aren’t typically a factor. 
  • Private Money: Score based.

Instead of looking at your credit score, hard money lenders look at your financial history for things like bankruptcy, foreclosures, etc. 

Additionally, not only is hard money not determined by your credit score, but hard money loans can also be used to help fix your credit score (something that private money isn’t necessarily designed to do).  

If you have concerns about your credit score, check out our information about usage loans.

2. Flexibility

  • Hard Money: Super flexible and great for unique projects! 
  • Private Money: Less flexible, often better for larger communities.

If you have a project that’s a bit outside of the box, hard money is often the way to go since these loans aren’t restricted as much as traditional bank loans.

In contrast, private money tends to be best for projects that are a bit more “typical” in real estate investing. It can be tricky to get private money loans below $125,000, so if you’re looking for a fast, small loan, hard money might be a better deal.

3. Loan to Value

  • Hard Money: Up to 100% financing.
  • Private Money: Typically maxes out at 70% of the repair value and 90% of the purchase.

Sometimes you can find private money loans with great terms, but typically hard money can offer higher LTVs.

4. Markets

  • Hard Money: Local.
  • Private Money: National.

Private money has the advantage over hard money when you’re looking in larger communities. Most hard money lenders have smaller areas (or two or three states) they specialize in, and they like to stay focused on those areas.

5. Pricing

  • Hard Money: More expensive.
  • Private Money: Less expensive.

If you’re in a large city, and you’re looking for the best pricing, private money will typically be less expensive than hard money. 

It’s important to note that the difference in cost between these loans is often in the points, not the rate. 

Often, hard money loans are anywhere between 2 and 3 points, with loans around 6-9 months. In contrast, private money loans are often closer to 1-1.5 and offer longer loans of 12-18 months.

Which Loan is Better?

It depends what you need!

If you need a flexible, quick loan with higher LTVs that isn’t going to penalize you for a less-than-spectacular credit score, hard money is the way to go.

If you need longer terms, better points, and something that’s designed for larger communities and typical projects, check out private money loans. 

Explore Our Resources

Real estate investing is great, and both of these loans should be in your investing toolbox. 

If you want to explore a hard money loan, feel free to contact us at Info@HardMoneyMike.com. We’re always happy to talk through a deal or help you figure out what sort of loans are right for you.

You can also check out the free tools on our website or our YouTube channel where we offer investment tips and tricks. Our #1 goal is that you feel confident and equipped to succeed as a real estate investor. 

Happy investing!

How to Get 100% Fix and Flip Financing

The key to real estate investing is leveraging other people’s money to cover your fix and flip financing.

Getting your fix and flips covered 100% comes down to 3 things:

  • Finding the right money 
  • Striking at the right time 
  • Understanding hard money

Especially for new investors, hard money (also called private money) loans are usually the key. Hard money is flexible and often has less rigid requirements than more traditional loans. This makes them perfect for fix and flips.

3 Ways to Get 100% Financing for Fix and Flips

Especially in today’s real estate climate, using hard money is a crucial link in the chain of building wealth. 

Rates are high and a lot of banks are offering fewer loans. So where are you going to find the money?

There are three strategies that help you leverage hard money to build wealth by covering 100% of fix and flip financing.

1. Find Great Deals

This may seem obvious, but it’s more important to be strategic than ever before. 

Look for properties that have a minimum 70% ARV (After Repair Value). Take your time to make sure you’re finding properties that are going to have a solid return. Don’t take risks on properties that aren’t likely to flip.

Remember: it’s better to have 2-3 solid deals than 6-8 bad or marginal deals.

So look for those 70% ARV properties.

2. Cross Collateralize

Sometimes called “crossing,” this strategy lets you use one property to get another at 100%. 

If you have another rental, a home, or a fix and flip that’s hit the market, you can use that property as leverage to get the next property. 

You will need to have a mortgage on both properties. Doing this basically gives the lender more protection. If you’re confident that you’ve picked good properties with high ARVs, then cross collateralizing is a fairly low-risk move on your part.

As long as you get that flip done and paid off, then both liens are released once you sell the new flip. 

3. Find a Cosigner

Again, this strategy helps lenders feel more secure on their end. If you’re a new investor, it can be helpful to find a guarantor with the assets who’s willing to cosign on a loan. 

As with crossing, as long as you’ve selected strong properties, this is a low-risk strategy that simply allows you to get 100% financing that you can pay off when you resell the property. 

Your guarantor should never need to pay a cent, but it makes it easier for the lender to approve financing. 

Fix And Flip Financing Made Easy

The market is gearing up to be great for real estate investors. Don’t be afraid to start your investment journey. Just remember:

  • Find great deals
  • Cross collateralize 
  • Find a cosigner

Hard money loans are a great place to start. They’re flexible, and you’re more likely to find 100% financing through a hard money lender, especially as a new investor.

If you do end up needing DSCR or other traditional loans, you can check out our sister company, The Cash Flow Company

If you’re interested in discussing a deal, reach out to us at Info@HardMoneyMike.com. We’re always happy to run through deals and answer questions.

How to Finish the Project With a Hard Money Loan

If you have a property that’s draining your cash, look into a hard money loan that can help you finish the project and get it off your plate.

A lot of clients reach out to us who have started a project – a flip, a rental, etc. – and are struggling to reach the finish line. 

Delays in the real estate world can quickly cost thousands of dollars, so how can you avoid those issues with a hard money loan?

The Problem With Stalled Projects

Stalled projects cost money in a few different ways.

1. Payments: 

You have taxes, insurance, and loan payments for as long as you are in charge of that property. The longer you hold onto the property, the longer those payments are coming out of your pocket.

2. Missing the Market:

Real estate markets move fast. Although a delay of a month or two can feel small, missing the market often makes it difficult to sell the property. 

The most common way around this is to lower the asking price by a few percentage points… which is then more money that you’re not making in that deal.

Why Should You Get a Loan to Finish a Project?

Let’s look at some real numbers you might encounter if you were struggling with a stalled project:

For even a two month delay, a project can easily cost $5,700 in payments alone. 

Let’s consider the fact that this investor also likely missed the peak market. If they were hoping to sell this property for $400,000, then decreasing the asking price by 5% would immediately result in a $20,000 market loss. 

That is both discouraging and super costly… but it’s also avoidable with the right kind of loan.

How Does Hard Money Help?

If your project is 60-70% complete and you just need a loan to help you cross the finish line, hard money loans might be right for you.

These loans are flexible. Because you’re not looking to pay off the full amount, only cover the last leg of the project, it’s typically easy to work out a deal with a lender.

A Finish a Project loan does not take over everything. It doesn’t refinance the project. They’re designed to help you complete what you’ve started as quickly as possible. That way you don’t miss out on the market or get stuck with months of additional payments. 

Looking for a Finish a Project Loan?

If you’re interested in a Finish a Project loan, reach out to us! You can check out our page about these particular loans or contact us at Info@HardMoneyMike.com.

We’re more than happy to discuss your options and help you find the right path towards your success.

Happy investing!

Why You Shouldn’t Use a DSCR Loan for a Fix and Flip

A DSCR loan is great for rentals, but why don’t they work for flips?

DSCR loans definitely have their place in the real estate investor’s arsenal. But if you’re trying to do a fix and flip, this loan might not be the right fit for you.

How Does a DSCR Loan Work?

DSCR stands for Debt-Service Coverage Ratio and is a loan particularly suited for rental properties. Like any other traditional loan, a DSCR is able to fund up to 80% of the purchase price or appraisal, whichever is lower.

For example, if you have a $200,000 property, the DSCR will cover up to $160,000 (80% of the total purchase price). This leaves $40,000 left for you to cover on your own.

As mentioned above, this loan is very well-suited for properties that generate steady cash flow (like a rental), but they can be more difficult to work with in the fix and flip game.

Why You Shouldn’t Use DSCR for Flips

You Need to be Rent Ready to Get a DSCR

In order to qualify for a DSCR appraisal, a property must be rent ready. This creates a lot of hurdles in the fix and flip world since many flippers are doing more than basic cosmetic repairs. 

DSCRs Have Prepayment Penalties

Most DSCR loans come with prepay penalties. These penalties typically come in 3- or 5-year plans. Again, in a rental market where you’ll be holding onto the property for longer amounts of time, you typically don’t need to worry about the prepay. 

However, the fix and flip market moves quickly. DSCRs penalize investors who pay off these loans quickly, something fix and flip investors often work towards.

You’ll Pay More For Rehab

In addition to the remainder of the purchase price, DSCRs don’t cover renovation costs. This means that even more money will need to come out of your pocket. 

Make Sure Your Loan Fits the Project

DSCRs are a great product for rental properties. However, if you’re looking at doing a fix and flip, take a look at other types of loans.

The most flexible loans are going to be hard money (also called private money) loans. 

We have a ton of free tools on our website that can help you find the right loan to fit your project. We’re also happy to chat with you about any particular deals or questions you have. 

Just reach out to us at Info@HardMoneyMike.com.

BRRRR Strategy: Successful Real Estate Investing with Hard Money and DSCR

How can you combine a BRRRR strategy with hard money and DSCR loans to win in the real estate game?

It’s amazing that there are options out there that let you build a real estate portfolio using little to no money. Using the BRRRR strategy with resources like hard money and DSCR loans lets even new investors get ahead. 

Using BRRRRs, hard money, and DSCRs together lets you do your fix and flips with little to no money in. 

Although this takes work, it is a tried-and-true method of generating wealth with solid resources and hard work. 

What is the BRRRR Strategy?

BiggerPockets launched this acronym a few years ago. BRRRR (Buy, Rehab, Rent, Refinance, Repeat) centers around fixing and flipping discounted properties.

BRRRR is all about buying properties with built-in equity that can be renovated to raise the value. We’ll likely start seeing more discounted properties in 2024 as foreclosures rise. This will provide a perfect landscape for BRRRRs. 

We recently helped a client buy seven properties this year thal all fit in these guidelines. They bought the properties with private money, and they’re refinancing them with a DSCR product. 

But it all starts with the Buy: look out for discounted properties. Yes, it takes work to rehab, rent, refinance, and repeat. However, by using the BRRRR strategy, you and clients like the one above are able to maximize profits in your real estate investment journey. 

Where Does Hard Money Come into Play?

Beginning the BRRRR process with buying a new property typically requires a lot of money. But don’t panic!

At the beginning of the article, we told you that you could use the BRRRR strategy with little to no out of pocket costs, and we’re about to tell you how.

Hard money loans are the key to making it all happen. Hard money is super flexible so you can use those loans to not only purchase, but also rehab or even cover closing costs. 

At Hard Money Mike, we specialize in hard money loans.

Hard money lenders typically look at your loan to value (LTV). It’s great if your LTVs can be close to 75%, but you’re welcome to reach out if you have any questions or concerns about whether you might qualify for a hard money loan.

Using DSCR to Refinance Your BRRRRs

Getting your property refinanced is a crucial step in the BRRRR strategy. 

DSCR (Debt Service Coverage Ratio) was specifically developed for real estate investors. The benefit of DSCR is that lenders aren’t concerned with your business’s income. 

Instead, they look at the specific property to see if it has positive cash flow. If it does and you have good credit, you’ll likely be able to refinance your hard money loan 75%-80% of the current appraised value.

If you bought at a discounted rate but rehabbed the property, the new value should be closer to everything else in the neighborhood.

BRRRR Strategy + Hard Money + DSCR = Success!

You need all three of these to really be successful at building your real estate wealth from little to no money.

Beginning your real estate investing journey can be a slow process. The first year, you might only complete the BRRRR strategy for one or two properties. 

But the longer you do this, the easier it gets. As you understand more, you develop contacts, and everything gets easier. 

Realistically, if you’re looking to build wealth from real estate investing but don’t have extra cash on the front end, you could likely use the BRRRR strategy on up to ten properties over the next three years.

By using the resources available (like BRRRRs, hard money, and DSCRs) you can build up your portfolio and wealth with hard work.

Time to Make Some Deals

Remember, it all starts with buying discounted properties with hard money loans. Then, keep using hard money for rehab, and refinance with DSCRs. 

If you want to learn more, we have a ton of free tools that can help you in the real estate game. 

If you have questions about hard money or want to discuss a deal, just reach out to us at Info@HardMoneyMike.com

You can also check out our YouTube channel for more real estate investment strategies and tips. 

Happy Investing.

Get Ready for Real Estate Opportunities in 2024

Real estate opportunities are coming in 2024, and we want you to be ready!

The stats are clear: it’s a great time to be a real estate investor. So how can you prepare your money to take advantage of the market?

Let’s start with looking at why this opportunity is coming and how it’s leading to a beneficial market for investors. Then we’ll dive into what you can do to be prepared.

Rising Debt Levels and Stress

Rates are rising, and with that, consumer debt, credit cards, and student loans have also increased. According to the Fed, they’ve all hit a new high at $17 trillion in consumer debt. 

With more debt out there (and higher balances), consumers are under more stress as banks look for even higher credit scores. Because of this, even though home prices are stabilizing—potentially even going down—a lot of people can’t tap into that equity.

Implications for Real Estate Investors

This might sound like bad news. However, if you’re a real estate investor who’s prepared for these changes, this is going to create some real opportunities in the near future!

As consumers credit cards, rates, payments, and stress rise, a lot of people are going to be vacating their properties. 

We can help those people who are in need of relief to take over properties and create the generational wealth and the mailbox income they need.

We didn’t create the problems these people are facing. But through smart investment and coming alongside new investors, we can turn the situation around.

Key Statistics to Understand the Opportunities

Consumer Debt: We already mentioned the $17 trillion in consumer debt.

Credit Card Delinquency: According to the Fed, over the past six quarters, we’ve seen a rise in credit card delinquencies. While the numbers aren’t astronomical, they are rising. If rates keep going up, we’re going to start seeing more defaults.

Mortgage Delinquency: Credit cards will also stress people’s money which can trickle into mortgage delinquencies. Although mortgage delinquencies haven’t shot up yet, we can expect a boomerang effect in about six months because of the rising rates of consumer debt. 

How Does This Affect Consumers?

Let’s look at an example.

Let’s say a year and a half ago, someone had a credit card balance of $10,000. Interest rates were low. We’ll say they had a 14% interest rate, and they maintained that $10,000 balance throughout the year. So that would mean they have about a $1,400 payment of interest to the credit cards over that time, or just a little over a hundred dollars each month. 

Today, interest rates and balances have gone up, while credit scores have gone down. 

Now, for the same consumer, interest rates are likely to be closer to 29%. Instead of paying $1,400 for the year, that rate has more than doubled at $2,900 or just under $250 a month. 

Those numbers are pretty small in comparison to what a lot of consumers are facing: $30,000-$50,000 in credit card debt, car payments, student loans.

Additionally, most people’s income isn’t rising as fast as their interest payments. 

This Creates Real Estate Opportunities… If You’re Prepared!

If real estate investors take these signs seriously, there’s a huge opportunity for business. But you have to start getting your money in line now.

1. Find hard money.

Hard money is extremely versatile. Because of this, it’s great for when you need to make quick deals or close in days instead of weeks. 

Hard money can also offer a higher loan to value which is perfect for the market we’re looking at in 2024. If you want to learn more about hard money, check out our recent post on all the different things you can do with hard money.

2. Raise your credit score.

In order to take advantage of the coming opportunities, you need to make sure your credit score is in line. 

Lenders aren’t always going to cover everything, so you need credit cards in your money bucket to cover those other expenses.

3. Fill your money bucket.

Where does that money for your money bucket come from? 

There are a few ways to fill your money bucket. One of the most important ways to make sure you have funds is to use business credit cards whenever possible. By separating your personal credit from your business credit, you protect your credit score and can keep it higher. 

If you need help settling personal credit cards to fix your score, our sister company The Cashflow Company can help with that. 

In addition to credit, you can fill your money bucket with HELOCs, other lines of credit, or other people’s money. Getting friends and family to invest in your projects often gives them a better return. It also ensures you have the funds to work with while your lenders are still determining your approval.

4. Partner with a reliable lending company.

Companies like us work really well with these types of real estate opportunities. With hard money, you’re able to take advantage of these moments because you won’t have to wait for slower lenders. 

Similarly, if you’re in a rural area or smaller town, you might have trouble finding a good deal with Wall Street-type lenders. Large lenders often add additional rules and regulations to rural areas, whereas hard money is flexible no matter who or where you are. 

It’s important to find the right lender for your project.

If it’s unique and you’re looking to close quickly, look at hard money loans. Hard money is going to be more important in the coming real estate wave than ever before.

Don’t Miss Your Opportunity!

In the next year, look out for real estate opportunities. This is your chance to create that generational wealth that can change everything. 

Our whole goal here is to make sure you’re successful. 

We have tons of free tools on our website, so make sure you check those out as you’re preparing for 2024. They’re free and easy to use!

Again, if you have questions about the next wave of real estate investing or want to see if a hard money loan is right for you, send us a message at Info@HardMoneyMike.com.

Happy Investing.

What Can You Do With A Hard Money Loan?

Hard money is so versatile! Understanding how much you can do with a hard money loan can open doors for your projects.

As long as the deal you’re looking for is backed by real estate for investment or business purposes, hard money is one of the most flexible options out there.

Unlike a lot of other options, hard money lenders aren’t confined by the same restrictions as traditional loans. This means you can use hard money for a wider variety of real estate investment projects.

Fix and Flip Hard Money Loans

Hard money loans work exceptionally well for fix and flip projects. Here at Hard Money Mike, we specialize in hard money loans for fix and flips. 

Hard money loans can often be specialized for your individual project which makes them ideal for real estate investing and renovations. 

Similarly, if you’re looking to renovate and rent (instead of sell), you can look for a hard money loan to help cover the cost of rennovations.

Gap Funding with Hard Money

Gap funding is a term used for a variety of loans that cover the “gaps” in a larger loan. This is often simple to find through hard money loans, provided there’s good equity in the deal.

One type of gap funding is bridge loans. If you need temporary financing or are looking to buy one property before selling the other, look for bridge loans from hard money lenders.

Similarly, gap funding also covers usage loans. With usage loans, lenders pay off the investor’s credit cards which helps their credit score go up. This lets real estate investors get the funding they need to focus on their project.

We also strongly encourage our investors to have a separate business credit card to keep their scores high.

Project Completion Loans

If a property is sitting stale or taking too long to get money out of escrow, hard money loans can play a huge role in project completion. 

The faster you complete your project, the lower your overall project cost. Also, the better chance you have of hitting a good selling window in the market.

Land Purchase and Development

The flexibility of hard money can work well for investors and business owners who want to buy property to develop. While big companies are often less interested in rural areas, hard money lending doesn’t have those same hang-ups.

Additionally, because hard money lenders can adjust for the client’s needs, it’s easier for you to buy large plots of land to later split into multiple parcels. It’s also easier to use that money for things like modular home development.

A good hard money lender will be able to help you get money in order to purchase and begin development quickly.

Hard Money Loans for Business Needs

You can use a hard money to buy out a partner who owns real estate or to expand their business by buying equipment or other needs. 

If you’re a business owner, you also might be able to use a hard money loan to cover payroll expenses thanks to its flexibility. So long as some level of real estate is involved, hard money lenders are able to support.

First Time Investors or Poor Credit Scores

If you’re a first time investor looking for a good deal, hard money is likely the way to go. 

Depending on how good the deal is, hard money lenders will sometimes give up to 90% to 100% even if your credit score is less than 600.

Hard money lenders are able to be more understanding regarding credit scores and are often more willing to lend to people with lower scores. This in turn really helps out newer investors who are trying to build capital.

Unlike large Wall Street-type companies, hard money lenders care more about the loan to value and the property’s value.

Hard Money for Unique Projects and Situations

Hard money is ideal for unique situations and real deals that can make investors money. 

If you find yourself stalled in the middle of a project and pressed for money, hard money lenders are flexible. Even in the middle of a mess, a good lender will try to help you find a solution.

Refinancing during a project can be tricky, but it’s significantly easier with hard money.

Similarly, strange situations happen all the time that can leave investors high and dry. If a bank is bought out and your loan is due when you’re not ready, hard money loans can bail you out.

Hard money also works well for mixed use commercial projects. 

Wholetail and Transactional Deals with Hard Money

If you’re looking for a short term wholetail deal, hard money works well. Hard money can even work for loans as short as 30 or 60 days. 

Transactional deals refer to when you’ve found an amazing deal and you plan on buying and selling within a week.

Hard money is perfect for those kinds of deals because they often have a higher loan to value than private lenders like.

The Benefits of Being Outside the Box

Hard money lenders don’t have a box we need to fit into which lets us help you out in a wide range of situations. 

Especially in 2023, banks are walking away from certain deals which makes hard money even more important.

If you’re interested in looking at more traditional loans, check out The Cash Flow Company. However, if your project is outside of the box, hard money might be the way to go.

If you have questions or want to talk about your project, contact us at Info@HardMoneyMike.com.

You can also check us out on our YouTube channel.

Happy Investing.

Hard Money Loans for New Investors

Hard money loans open doors for newer, smaller investors who are looking for a way to enter the real estate game.

Our goal is to make it as easy as possible for new investors to find the right information so they can be successful.

What are hard money loans? 

Hard money loans are short-term asset-based loans secured by real estate. These loans are typically provided by private investors, small companies or individuals in your local area. 

The main advantage of hard money is they provide quick real estate financing based mostly on the asset and not on your credit score. 

Hard money loans can be used for many things:

  • Funding a fix-and-flip
  • Financing the front-end of a BRRRR project
  • Overcoming credit limitations often experienced by new investors
  • Purchasing land for development
  • Funding some construction projects

Pros of Hard Money Loans:

1. Speed

Whereas Wall Street companies or banks may take two to four weeks, getting approved for a hard money loan typically takes five to seven days.

Speed is critical in investing, and quickly getting your money upfront is crucial in the real estate game.

2. Upfront Financing

Hard money loans also give you money upfront. This allows you to get your escrows out to start the project. Most large companies want you to put money in first. This can be a particular problem for new investors, and hard money lets them get their foot in the door. 

3. Flexibility

Large companies often have very strict lending criteria. If your project is unique, if it’s outside of the box, hard money lenders are more likely to consider it.

4. Higher Financed Amounts 

If you find a deal that has a good loan-to-value ratio, hard money lenders may lend up to 100% of the financing. This lets you keep more of your own money in your pocket and use the lender’s funds for your project.

5. Property-Focused Approvals

Finally, approvals for hard money loans are mainly based on the property itself, the exit strategy and the planned renovations or improvements. Hard money is often a good fit if you’re an investor with limited credit history or a unique property or area.

Cons of Hard Money Loans

1. Higher Costs

While interest rates on hard money are typically similar to other lenders, costs can be anywhere from 1% to 1.5% higher. However, faster closing times often offset the higher cost and can get you better deals than Wall Street companies.

2. Shorter Terms

Typically, hard money lenders offer financing ranging from six to twelve months. Therefore, if you’re looking for something longer than twelve months, Wall Street companies or a local bank may be a better fit. 

3. Limited Availability of Hard Money

Additionally, it’s important to remember that most hard money lenders are individuals, small companies, or private institutions. These lenders only have a finite amount of money to lend. It’s often necessary to build good relationships with local hard money lenders to ensure access to funds.

Hard Money Resources for New Investors

It can be tricky to determine what option is best for you. Because of this, we’ve compiled some resources to help you shop around for the right fit for your project.

Sites like Connected Investors help you network with other people in the business. Get plugged in with your local realtors, wholesalers, and lenders. Talk to other people in the industry to make sure you’re getting the best deals. 

To help you shop around, we also have a great tool called the Loan Cost Optimizer that helps you find the good lenders. It’s free to download and to use!

If you’re still not sure if hard money loans are right for you, no problem! Check out the Cash Flow Company website or YouTube channel to learn about other, more Wall Street-style options that have the same personal connections as hard money loans. 

Additional Questions and Research

Hard money is a very important tool, especially for new, small investors. However, you should always shop around, look around and talk to other experts so you know your options. Also, experts can help you better understand the terms and conditions of hard money loans so you know exactly what you’re getting into.

If you have questions about hard money loans, contact us and we’ll be happy to help you out!

Additionally, you can check out this video on our YouTube channel.

The Funding Ladder: How to Get the BEST Real Estate Financing

What does it really look like to get the best real estate financing? Let’s go step-by-step.

Hard money is a stepping stone.

You start here. But you also need to know where you’re going.

One of the most common questions we get from beginner real estate investors is:

“Who can I borrow money from? How do I step out from just using hard money?”

We want to get you started with the money that makes sense for you now – but we also want to show you how to work up to Wall Street money, OPM, or even funding with your own cash.

We think of this journey as The Funding Ladder. Let’s go over what beginners should know about real estate financing – and how to get to each rung of the ladder.

The Importance of Real Estate Financing

Funding is at least half of what makes investing successful.

Yes, you have to buy good properties and get them at a good number. But the right funding is what truly seals a deal.

  • Sometimes that means the funding is fast, so you can buy the good, available properties that need a quick close.
  • Sometimes it’s funding that’s cheap. Cash flow is king, and lower-cost financing increases your cash flow.
  • Sometimes it needs to be flexible. It needs to fit what you can apply for and get.

The Funding Ladder: 6 Levels to the Best Real Estate Financing

As you go from level to level, you accumulate more money because you save more money. Every time you step up, you’re going to put more money into your pocket, have more deals available, and at better pricing.

Here are the 6 rungs of this funding ladder.

#1: Partnerships

Typically, most people will start in either partnerships or hard money. 

Partnerships are great because you don’t have to provide any of the funding. The partner will provide all the funding – and maybe even some expertise. The negative about a partnership is typically they’re going to take at least 50% of the profits and probably be a little too involved in the project.

But when you’re starting out and you need some experience and you don’t have the money, this is a great way to go too. You could do two or three deals with the partner, build up your experience and cash, then move to the next level. 

#2: Hard Money

Secondly is local hard money.

This is asset-based lending. For real estate investors, this is what hard money used to be until they started changing the name to private money. Now, sometimes it gets a little confusing. Hard money, private money, fix and flip loans, rehab loans – they’re all referring to the same thing.

What you get from hard money is true investor-grade financing where they lend a higher loan-to-value, so you don’t have to put as much into the property. 

They will be flexible. They will look at unique deals: land or small commercial or any type of unique property. Local hard money likely won’t care much about your credit score – so it’s a great option if your score is sub-700. 

Additionally, hard money lenders care less about your experience. As long as your deal is sold, they might not require you to have completed any projects before.

Hard money is typically fast also. So if you need to close something in five days instead of 10 or 30, local hard money is the best real estate financing. 

The cons of hard money are that:

  • They’re smaller lenders with a smaller fund – so it’s possible for them to run out of money.
  • They tend to be more expensive. It may cost you 1 – 1.5 more points than when you go with Wall Street private money.

#3: Wall Street Private Money

Next is what we call Wall Street Private Money. These are large firms.

The best part about these is they have seemingly unlimited funds.

They have similar interest rates as local hard money. Sometimes hard money is actually cheaper on the rates, but you’ll find private money 1-1.5 points cheaper.

The other benefit of private money is it could lend in multiple states and multiple regions. Typically, your partnerships, hard money, or even local banks will not lend out of their region.

They typically also could do longer terms. It’s not uncommon for them to do a 12 or 18 month. We don’t suggest that you take longer than 6-9 months on a fix and flip loan because the interest eats away at your profits every month. But the option is out there with private money.

Now, the negatives for the Wall Street private money:

  • They have a box. If you don’t fit in their box, they won’t make their funding work for you. They find enough people who do fit in their box. So, if a property is unique, rural, etc, then they typically won’t bother.
  • Typically, they’ll require 3-5 years of experience to get their best rates and terms. 
  • They’re also going to require that you have a decent credit score. The actual requirement changes, but right now it’s a minimum of 660, with a preference of 720+.
  • Wall Street private money lenders won’t give you any escrow advances. When you close, they may fund 100% of your escrow for your fix-up, but they won’t give you any advance to start. So if you have like a $60,000 budget to fix up the property, they want you to put in that first $20,000 and then they will reimburse you.

#4: Local Banks

The next rung on the ladder of the best real estate financing is local banks.

There are a lot of small to mid-size local banks that love to lend to real estate investors. Rates are high currently from the Fed, but banks are still 1-2 points cheaper on the interest rate even compared to the Wall Street money points’ cost.

The negatives with local banks are:

  • The speed. It can take two to four weeks minimum for them to fund a deal, which could cause you to miss out on deals. 
  • Local banks require certain credit scores, too, like private money does.
  • They’ll also require money down and investing experience.

#5: Real OPM

Next is what we call real OPM (other people’s money). This is truly the best real estate financing. Regardless of your experience level, you can work toward getting OPM. Any rung on this ladder benefits from Other People’s Money.

Real OPM is money from real, normal people, not institutional lenders. It could be family, friends, or other people in your community.

These people want better returns for their money than they can get at a bank. Lending to you can be a way to get that secured return. out there looking for better returns. 

You can also get a much better rate with an OPM lender than at a bank, credit union, private money, or hard money lender. There’s nothing out there that’s faster, cheaper, or easier to get.

Once you build an OPM relationship, your lender will want to give you money as much as you want to get it. It’s simple to call them up and let them know you found a good deal. There’s no underwriting, no credit checks, and oftentimes they can fund the full amount you need.

It’s important to attract and keep your OPM lenders (if you want more help setting this up, reach out to us – this is one of our specialties!).

#6: Lines of Credit

As you accumulate properties, you’ll want to move on to lines of credit as a funding source. This is where banks (whose loans are slow) can offer you a product that’s quicker than the rest.

A bank line of credit is like a big HELOC, except instead of being on one property, it spans 5 or 6. This line of credit is immediate funding – which is great for fast auction closes.

When you have a large line of credit at your disposal, all the wholesalers and local sellers will go to you first because they know you’ll give them a fast close. 

How Do You Get the Best Real Estate Financing?

We want people who come into this business to understand that hard money is a stepping stone. They’re going from here, but they also need to know where they should be headed. 

We want to educate people, make them comfortable, confident real estate investors, and help where we can along the way.

Have questions about any point in this process? Want to talk with someone about how to go from where you are now up to the next step? Reach out to us at Info@HardMoneyMike.com

Happy Investing.

Why You Need Hard Money in 2023

Institutional lenders aren’t cutting it this year. Here’s why you need hard money.

When the Fed raises rates and big institutions like banks and hedge funds tighten money… Where is the real estate investor supposed to go to get funds?

2023 is a great time of uncertainty. Uncertain times can be the hardest and most expensive – but best! – for buying.

One solution for real estate investors: hard money.

It’s a simple truth. In 2023, you need hard money. Let’s explain why.

You Need Reliability

True hard money is from real people. They need the interest they get from these loans whether times are good or bad, so hard money loans are less likely to change with volatile markets.

These lenders don’t run when they see inflation, and their interest rates won’t fluctuate nearly as much as institutional rates.

In fact, banks’ interest rates are getting closer and closer to hard money rates. In the Colorado market, many banks are only charging 1 point less than hard money lenders.

You Need Hard Money’s LTVs

A huge issue with bank and institutional lending right now is the amount they’ll lend.

We’ve had a recent client share their experience with a big private lender. While they used to lend 90-100% of the purchase price of a property, they’re now offering 49% for comparable real estate in metro areas for certain borrowers. In smaller communities, they’re down to 60% LTVs. 

Banks must do this, not just to mitigate risk, but also to attempt to keep their prices low. Hard money is not this way. Hard money rates and terms are the same in good markets and in inflationary ones. The hard money you get in 2023 is the same hard money you got in 2020.

You Need Flexibility

You need a lender who will not only be able to move with the markets but also work with your specific deal.

Maybe you need a second lien, a unique land loan, a bridge loan to buy your next project, or a bridge to cover the costs of a house that’s been stuck on the market for too long.

Big lenders and banks don’t provide those types of loans. And with the market that 2023 is bringing us, you’ll need all the flexibility you can get with your lender.

You Need an Investor-Friendly Lender

Many smaller banks and credit unions aren’t even open to lending to real estate investors. For your career, you need a lender who will work with people who have real estate businesses.

Larger institutions, however, have raised their credit score requirements so high, it boxes many investors out. Banks have raised their minimum credit score by at least 40 points. They used to take people with as low as a 620; now, it’s 640 minimum.

The problem is, some real estate investors don’t have great credit scores due to high credit usage on the lines of credit they use for flips. Hard money is the answer here, since it doesn’t keep strict score requirements.

Getting Hard Money in 2023

Other types of lenders have raised their rates, increased their costs, and lowered the amount they’ll give you in 2023.

If you need the same amount, for the same price, try hard money loans. Hard money doesn’t scrutinize you as a borrower and make decisions based on the Fed. It bases your loans on your property and your deal instead.

Not all lenders – of any type – will give you the same loan. That’s why we want you to use this free deal analyzer. You can enter information for three hard money lenders (or a hard money lender, a private lender, and a bank) to find out which option will truly save you the most cost.

Any other questions about hard money? Reach out at any time to Info@HardMoneyMike.com

Happy Investing.