Tag Archive for: Real estate investing

What Is Gap Funding? (What to Do When Your Main Loan Leaves Gaps)

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What is gap funding? Let’s go over 4 types of small loans: bridge, reserves, rehab, and usage.

The gaps lenders leave on real estate projects are getting bigger.

They’re asking you to put more money in. Leave bigger reserves. Have better credit scores.

We see this daily as we help clients with small loans. Let’s go over some of these small loans that we call gap funding:

  • Bridge loans
  • Reserves
  • Rehab costs
  • Usage loans

Bridge Loan Gap Funding

Bridge loans: if you have a project that’s either on the market or going on the market, but you need to get into your next project. You have to keep making money, but your capital is tied until that first property sells. 

These bridge loans are usually between $10,000 and $75,000, used for a down payment on your next project.

How it works: you put a lien on both properties, then when the first one sells, you pay off the bridge loan. This can keep you going from flip to flip with no pause in projects.

Reserves

Another spot in the real estate investing process for gap funding is reserves. Banks are requiring more money in reserves to cover any unknown expenses or payments.

We just did two loans to help with reserves. 

One was for a flip. Someone needed to borrow money. They had a property on the market. They’re buying their next one, but the lender that was funding their new deal required six months of reserves. We did put a second mortgage, on the property. When it sells, we’ll get paid off, and they’ll be onto their next deal. 

The second was an investor who needed reserves for a long-term loan. He was refinancing his investment property, but he was short on reserves. We were able to use another property in his portfolio to do a loan. Once the cash-out refinance is done, he’ll pay us back.

Funding Gap in Rehab Budget

Maybe your primary loan didn’t cover as much of the fix-up process as you ended up needing. This is another instance where gap funding comes in handy.

We also had another unique situation with a client recently. The borrower got the money in their escrow account when they set up the loan… but the lender would not release any escrow funds until he did at least a quarter to a half of the project. Yet he couldn’t start the project because he needed the funds from the escrow.

We stepped into this chicken-and-the-egg situation and helped him with a lien on another property to give him the funding he needed to kick off the project. When his other lender released the escrow, he was able to pay us back.

Usage Loans

Sometimes the requirement from banks that kills investors is the credit score limits. For many investors, this means their credit usage is too high – since they use lines of credit for their real estate projects.

We had a client out of Michigan who was trying to get a DSCR loan. He bought a property, fixed it up, and was going to do a DSCR refinance to get all his cash back.

But he used all personal credit cards for the project. This tanked his credit score. So when he applied for the DSCR loan, he was at an almost 10% interest rate with 3 points.

To help him, we did a quick usage loan to pay off those credit cards and let his credit score go back up. Then he can get into a long-term loan at a good rate with fewer fees.

Other Small Loans for Gap Funding

We’re able to help people in any of these circumstances who need a small gap funding loan.

In fact, in any situation where you need a loan and have a good property to put a lien on, we may be able to help you.

If you have any questions on this or other loans, reach out to Info@HardMoneyMike.com.

Happy Investing.

70% ARV: The Hard Money Trick That Could Cost You

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When a hard money lender tells you they’ll give you 70% ARV, what does that really mean?

Hard money lenders often say they lend up to 70% or 75% of the after-repair value (ARV) of a property.

Did you know that’s often misleading?

When private lenders (big hard money lenders backed by Wall Street funds) say they lend up to 70% of the ARV, there’s a slight trick that some borrowers miss.

Let’s go over the differences that “70% ARV” might mean for different lenders, so you can maximize your LTV.

The Full Cost of Your Flip

One thing to remember when you’re looking at fixed and flip loans: there are a lot of other costs besides the down payment. You’ll also have closing costs, points, interest, insurance, and other expenses not included in the amount most lenders give you.

We want to make sure we minimize how much comes out of your pocket so you can do more deals or at least get to that first deal.

The 70% Myth

Typically, most lenders in this market will lend you up to 70% of the after-repair value. This ARV is what you’ll be able to sell a property for (not buy it for). It’s how much it should be worth after it’s fixed up.

But here’s the caveat big hedge fund hard money lenders have:

That total 70% of the ARV is split between the purchase price and rehab. And typically, they’ll do 100% of rehab costs but limit the purchase price to 85%.

And this is for their best clients. You’ll see these LTVs cut, depending on your quality, the size of your market, and the location of your property. Smaller markets can go down to 80/90 for purchase price/rehab. Rural properties could go down to 65% overall – if they’ll even lend to you at all.

So the 70% is only for the best properties in the best areas. Let’s dive in and find out exactly how they don’t get to that 70% that they promise you.

Example of the 70% ARV Myth

Let’s look at a property that has an ARV of $200,000. This is what you think you’re going to sell it for, based on the comps.

If our hard money lender is going to give us 70% of it, that’s $140,000 max.

This works for most deals. As long as you follow these budgeting guidelines:

  • Real estate agent: 5%
  • Lender fees: 8%
  • Closing costs: 2%
  • Profit: 15%

Now, let’s say you’re purchasing a property for $120,000 and you’re going to put $20,000 into rehab. This gets you right to the $140k your lender will give you.

But now we got to remember one thing:

Best case, they’re only going to lend you 85% of the purchase price. In this case, that’s only $102,000. (They’ll still cover 100% of the rehab in escrow). 

This leaves $18,000 you’ll be paying for out-of-pocket. Plus, many of these lenders require 6 months’ worth of reserves (we’ve even given short-term loans to investors just so they had enough reserves to get a loan from one of these other larger hard money lenders).

Hard Money Lenders With a True 70% ARV

A smaller, local hard money lender like Hard Money Mike has a different approach to LTVs. Let’s walk through this example with the same $200,000 ARV property.

When we lend 70% of the ARV, that’s a true $140,000 for the right client and deal. This means the purchase is fully funded – plus you get the $20,000 in escrow for rehab costs.

Finding the Right Hard Money Loans

The offer from the bigger lenders will be right for some people. But if you want to maximize your leverage, small hard money lenders like Hard Money Mike give you an alternative.

Want to see if we have the right loans for your project? Reach out to us at Info@HardMoneyMike.com.

Happy Investing.

How to Save a Stalled Real Estate Project

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A good deal can still create a situation with a stalled real estate project. Here’s how to save it.

One of our favorite loans is the type that fixes a stalled project.

Stalled real estate projects most often happen when:

  • You run out of money before you run out of work to do, so the house can’t get on the market.
  • A refinance on a flip doesn’t work out, but the original high-interest loan designed for the short-term loan is racking up payments.

This situation accumulates interest, taxes, and other carry costs that you were not anticipating.

We love saving these stalled real estate projects. We don’t care if our loan is in second, third, or fourth position, as long as we see the deal coming through.

Let’s go through a couple examples of times we’ve recently helped clients with stalled real estate projects.

Funding the Escrow on a Stalled Real Estate Project

For this client, we funded him money in escrow to fix up a property.

He had another lender first. It was a big, national fix-and-flip lender who had a lot of money sitting in escrow for him. But, they wouldn’t release any money until he got his other properties finished first.

This client had a lot of other properties going at once, so he didn’t have the cash flow to fund this one. He also didn’t want to sit on his new property, waiting until his lender decided to give him his cash.

After four months of fighting, he decided to get a loan through us instead. We were able to fund the whole thing. We used a lien on another property of his properties to fund the whole escrow.

Now, he’s able to get this property done and on the market in time for spring. Once he sells, the other lender will release his funds, and he’ll be able to pay us back.

Funding an Over-Budget Fix and Flip

One of the most common stalled real estate projects we see: a fix-and-flipper runs out of money.

  • The budget was too low to begin with
  • The flipper got priced out of material and labor costs.
  • An expensive surprise was found in the house that wasn’t accounted for in the original budget.

We had a client come to us recently in this exact scenario. He knew he needed an extra $20,000 to $25,000. He wasn’t completely sure which.

He’s hoping it’s only $20k, but we gave him a loan for $25k anyway. This allows him to:

  • Not piecemeal a budget (getting a couple thousand funded here, a couple thousand there, etc).
  • Finish the project faster.

Now, he won’t miss the springtime market.

Why We Do Loans on Stalled Real Estate Projects

We’re glad to help real estate investors when money for projects falls just a bit short.

Anytime you have a good project or a good loan-to-value, us lending to you makes a win-win for everyone.

Need a small loan to finish a stalled project? Reach out to us at Info@HardMoneyMike.com, and we’ll see how we can help!

Why You Need Hard Money in 2023

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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.

3 Reasons Why You Need Hard Money for Your Investments

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Not sure about hard money loans? Here’s why you need hard money as a real estate investor.

MYTH: hard money always costs more than bank financing.

Over the last year with the fed raising rates, banks’ interest rates have come within 1% of where hard money is. Also, there are advantages hard money has that other financing doesn’t that can end up saving you money overall…

Here are the top 3 reasons why you probably need true hard money for your real estate investments.

1. Flexibility

Every other type of loan – from banks, credit unions, or big private money institutions – only comes within a very strict box. But not hard money.

Hard money is based on one main criterion: the real estate itself. As long as there’s a good property to back you up, hard money lenders will work with you under many circumstances.

Why You Need Hard Money: Splitting Land Example

For example, we helped our client Sam with a deal. He bought a small commercial property with some land next to it. He plans to split the land, divide it into lots, and sell the lots.

When he does sell the individual lots, he’ll begin paying off the hard money loan. We’re working with him to recast the loan as he pays the lots off.

Hard money has this flexibility, while Sam may not be able to get this project done with traditional lenders.

Why You Need Hard Money: Buying Assets for Your Business Example

As another unexpected example, we helped another client who was buying a dump truck for their concrete business. They needed $200,000 to buy the trucks at auction, then they’d be ready to pay it back in a couple of months with the new revenue the truck would generate.

However, they didn’t have $200k in cash available. What they did have was a piece of real estate, so we were able to put a lien on it and help them with the loan.

It doesn’t matter if it’s a first lien, or second, or even third. As long as the deal makes sense, a true hard money lender will look at it.

Why You Need Hard Money: LTVs

The best case scenario with the loan-to-value from other lenders will be 90% of the purchase price and 100% of the rehab.

True hard money, on the other hand, will always use the ARV on a fix-and-flip style property. Most hard money lenders will do 75% of the after-repair value, plus rehab costs.

We have flexibility because we look at the property and the exit strategy, and we take deals based on the likelihood of you and us both being successful.

True hard money is what you need when you need flexibility.

2. YOUR Requirements

Other lenders have a long list of requirements for you. Such as:

  • Good credit score
  • Past experience in real estate
  • A certain amount of reserve money

The beauty of true hard money is it’s based mostly on the property.

Hard Money & Credit

We don’t care whether you have a 600 or 620 score. Your credit score will not determine your loan-to-value, rate, or fees. All those factors are more based on the property.

Yes, we will look at your credit. We want to make sure you’ll pay us back, but we also know that, in this industry, a lot of credit scores are downgraded just because of usage.

Many real estate investors use their credit cards for projects, driving down their credit scores. We understand that’s how you have to run your business. We don’t believe it’s fair to judge whether we should lend to you based on high credit usage. 

Hard Money & Experience

Most lenders require you to have three to five complete transactions over two years in order to give you the highest loan-to-value.

With us, it really depends on the deal. We’ve now done three loans for an investor who came to us with zero investment properties under her belt.

The deal was so good: she could buy the property, rehab it, and still be under 70% ARV. We knew she’d have plenty to pay off the loan whether she sold it as a flip or refinanced it into a $200+ cash-flowing rental.

If you don’t have experience but do have a great deal, then hard money is your option.

Hard Money & Reserves

Big investment firms that do private lending and banks always require more money upfront, in both down payments and reserves.

We recently helped a client in Texas where the only thing stopping the private money lender from lending to them was the reserves. They were just two months shy of meeting the requirements. 

But we don’t really look at reserves. Once again, we’re looking at the property. Do you have the funds to finish the property? Is the property such a good deal your reserves don’t matter? That’s what we’re going to look at. 

3. Speed

The third reason you need hard money is speed. 

With hard money, you can close…

  • Without an appraisal
  • In days instead of weeks
  • On unique properties that would otherwise need extensive underwriting

Why You Need Hard Money to Close Fast

We had a client looking at a $330,000 property. He bid just $300k, and there were 6 other bidders. But, he offered to close within 10 days. The seller took his offer because of that.

In his case (and for many of our clients), the savings they get from closing fast more than cover any additional cost they spend in interest or fees for the hard money loan. Essentially, this client got his property with free money.

Why You Need Hard Money: Finding the Best Hard Money Loan

Flexibility, more relaxed requirements, and speed. This is why you need hard money for your real estate investing career.

But as with all lenders, it’s important to shop around for the cheapest deal on rates and fees. To help with this, download our free loan cost optimizer here. It’ll help you find out which loan is truly the cheapest for you.

Have more questions about hard money? You can reach us at Info@HardMoneyMike.com, or check out the resources on our YouTube channel.

Happy Investing.

How to Get That Property Done: The “Finish a Project” Loan

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4 “finish a project” loan case studies.

One of our most popular loans is what we call a “finish a project” loan.

We call it that because… That’s exactly what it does! We want to help you finish your real estate project no matter what comes up.

Local hard money lenders like us are different than private money or banks. We finance things no one else will.

Let’s go over a couple examples of how this loan has worked with our past clients to see if it’ll fit with your current project.

Finish a New Construction Project

Once a new build is started, banks don’t like to give out more loans partway through. This is the situation our client James found himself in.

He was building a house for himself. After he bought the property and got started, he became boxed in and ran out of money. He told the bank, “I have a property on five acres. It’s going to be worth $800,000. I only need $250,000 to finish it.”

But none of the banks would lend to him, for several reasons:

  • The project had already begun. Banks never like funding a project that’s already started.
  • His income didn’t meet their requirements. The property itself didn’t matter to the bank because James’s income was lower than they were willing to lend to.

So, James came to us instead. The project was only stalled because of money. He needed the $250k to finish the project in 5 to 6 months so he could get his family out of the trailer they were staying in on the property in the meantime.

Here’s what we did: we gave him the money out in escrows, or draws. He got $70k from us up front, then another $70k later, then another $80k, and so on.

We didn’t need to pull his credit score, scrutinize his income, and make sure he checks every box. We just needed the property to CO.

Finish a Bootstrapped Project

When any sort of flip is sitting stale for too long, sometimes the owner needs extra outside money to get things moving along so the property will start generating income.

Our client CW was a realtor who was finishing a project by turning a traditional rental into a short-term one. He had been bootstrapping the project (aka, funding it from his own resources).

His funds were slowing down with the change in the market, and Airbnb season was quickly approaching for the area. He needed a last $50k to finish the project.

So, he came to us, and here’s how it worked for him:

  • He kept his mortgage on the property.
  • We gave him $50,000 in a second-lien position on the same property.

He was able to get the house finished up and fully booked out for 6 months – generating plenty of income to pay off his loan with us.

Finish a Project That Goes Over Budget

With certain types of loans, banks can halt part of the funding if the project goes over budget. Here’s how it played out for our client John.

He had a construction loan with a bank. It was a great deal: they gave him all the money to build the property, then in the end it converts into a permanent loan at 3%.

However, he went over budget… so the bank stalled it. He needed $60k to get the project back on track and keep that 3% loan.

Here’s how John did it:

  • We gave him $60k.
  • He finished the project.
  • He could lock in the 3% bank loan for a 5-year term.
  • He took out a HELOC and paid off his loan with us.

Finish a Flip!

This fourth “finish a project” loan is our most common: working with fix-and-flippers.

Our client, PS, had a flip. Or rather, he had too many flips going at once. This one had been sitting for over 6 months, and he just needed $25,000 to finish up the rehab.

For those 6 months, this property was eating up funds. He was making mortgage payments, hard money interest payments, taxes, utilities, and everything with zero inflowing cash.

He had another hard money loan on the property, so we were able to come up behind him and get him the $25k.

Within 3 weeks, the project was complete and put on the market. Four weeks later, it sold, and he paid both loans off.

Why We Do These Loans

Big lenders won’t do deals like this for you. But as long as we’re in a safe lien position, we love being able to help you with these project finishes.

A couple of tens of thousands of dollars right when you need it can save you years of financial recovery.

Do you need a “finish a project” loan? Feel free to reach out at Info@HardMoneyMike.com. We’d love to see if we can help.

Happy Investing.

The $1.8 Million Dollar Mistake: DSCR Loan Interest Rates

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DSCR loan interest rates vary like crazy. Here’s exactly how to avoid a costly mistake.

DSCR loans are unlike any other loan out there.

Traditional loans are standard – every lender will have the same interest rates, terms, points, and closing costs. There is one system, one set of brackets that decides loan prices, and one approval process.

Not so with DSCR loan interest rates and other terms. This style of loan is the Wild West of underwriting.

With so much variance between DSCR loans, it’s more important than usual to shop between lenders. Let’s go over the $1.8 million mistake some investors make with DSCR loan interest rates.

Current DSCR Loan Interest Rates

We’d like to share a couple of examples we see in the DSCR loan world.

As a mortgage broker, we have a program that allows us to look at different rates from different companies. Every day, 10 to 15 different lenders put their rates on this search engine.

We search the same information daily to get a picture of the rates on these loans. We put the same:

  • Credit score
  • Debt service coverage ratio
  • Loan-to-value

Yet every lender offers a different rate. On the same 30-year DSCR loan, interest rates have looked like this:

  • The best: 7.04%
  • The worst: 9.46%
  • The average: 7.9% – 8.25%

These differences are not based on credit score, experience, property size or type, or debt ratio. These are the options for the same person calling around for the same deal. They could find anywhere between 7.04% and 9.46% – all depending on the lender.

The DSCR loan market is extremely segmented. And that is why it’s vital to shop around.

We want to break down the difference in DSCR loan interest rates for you. How much money do you lose on the worst DSCR interest rate vs the best?

How Much Different Interest Rates Cost You

Let’s say we have a $300,000 deal we want a DSCR loan for. We’ll look at 3 common interest rates: the high end (9.46%), the low end (7.04%), and the average (7.99%).

In this example, we have the same credit score, same rent income, same property expenses, and the same loan amount. These interest rate differences are purely about the lenders we’re using.

Low-End DSCR Interest Rates

With the lowest available rate, 7.04%, on a $300k, 30-year loan, payments are $2,003.

At the exact same time, with the exact same parameters, a 7.99% interest rate (average range) has payments of $2,199.

So, this is a difference of $195. Doesn’t seem like a big deal? If your rent is $2,100, a lower rate could mean the difference between positive cash flow and negative – or qualifying for the DSCR loan or not.

High-End DSCR Interest Rates

What’s this comparison at the other extreme?

Lenders with higher DSCR loan interest rates are usually the ones who take advantage of the segmented nature of this market. They raise their rates high, then raise their marketing budget too. They push their product hard to be the first option borrowers see; when they don’t shop around, they’ll settle for the higher rate.

And with this higher rate, a 9.46%, your monthly payment would be $2,513. That’s $509 more per month than the lender with the 7.04% rate!

All for the same property, same LTV, same credit score, but different lender.

Impact on Real Estate Investors

The monthly cash flow difference from DSCR loan interest rates will hurt everyone’s pockets. However, it’s especially rough for investors. What happens if you have three properties? Five? Ten?

If you got stuck with a 7.99% rate for all of your investments (rather than 7.04%), that’s $70k extra in interest over the life of the loan. How does that multiply with more investment properties?

  • 3 properties → $210k extra in interest
  • 5 properties → $350k extra in interest
  • 10 properties → $700k extra in interest

Let’s make the same comparison with the higher-end interest rate of 9.46% compared to the low-end 7.04%. Over the life of the loans you’d be paying:

  • 3 properties → $550k extra in interest
  • 5 properties → $917k extra in interest
  • 10 properties → $1.8M extra in interest

That money is all additional interest that could have been avoided. It’s going into the bankers’ pockets because you didn’t shop around for a better rate that’s easily available.

But what exactly do we mean when we say shop around?

How to Shop Around for DSCR Loan Interest Rates

The spreads on DSCR loans are large. But shopping around for any large purchase is no fun.

When you’re talking with any sort of salesperson, it’s nerve-wracking to not know whether they have your best interest in mind. What if you don’t know what questions to ask to get the right information? What if they try to take advantage of you?

We want to give you a couple of questions to ask to get the information you need to make an informed decision on your DSCR loans.

Questions to Ask DSCR Lenders

Firstly, a piece of advice: if a company won’t quote you a general range in a simple phone call, then keep calling. Find the ones that will.

Secondly, prepare all of your information ahead of time, and be sure to give every lender the same information. You’ll want to have the following information ready before you contact anyone:

  • LTV
  • Credit score
  • Is it a purchase or refinance?
  • Zip code of the property
  • Type of property (single-family, duplex, etc)
  • Rent (or estimated rent)

Next, you’ll want to have a set of questions to ask each lender. Even if you don’t have the property yet, coming with a specific example gives you an idea of who the good lenders are.

What to ask DSCR loan lenders:

  • What interest rate could I get?
  • Is there a prepay penalty? How long is it and how much? (The pricing of a 5-year prepay will always be better than a shorter-term prepay. But if you know you’ll want to sell the property within three years, you’ll need to keep a shorter prepay in mind).
  • What are your closing costs?
  • What’s your appraisal process for underwriting?
  • Is this a 30-year product? 40-year? Interest-only?

How to Analyze the Price of Different Lenders

Now, once you have all the information and numbers from your different lenders, you have to make sure you’re comparing apples to apples. One lender may have a lower interest rate but an extra 1-2 points.

What’s important is the final number you’ll have to pay. You can download our free analyzer here for an easy way to figure that out.

We want to get you the lowest rate to keep your investment business turning. Rates have been fluctuating like crazy, though. 

If you want a regular report on conventional and DSCR loan interest rates, LTVs, credit requirements, and more, ask us about it at Info@HardMoneyMike.com.

Happy Investing.

Hard Money Lender vs Bank Financing: Why You Need Both

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Which funding should you get? 3 case studies on a hard money lender vs bank.

In the typical real estate career, you follow this funding path:

  1. You use hard money because it’s all you can qualify for.
  2. With experience, you start qualifying for bank loans, so you move on from hard money.

What most people miss is a crucial third step:

  1. Now you have two valuable funding sources in your toolkit.

Most people view hard money as a stepping stone to “better” financing. While true in some ways, putting hard money in the past can make you miss out on some amazing opportunities hard money offers.

Let’s get over 3 examples of clients we’ve had who are far into their real estate career but still benefit from hard money. And lastly, we’ll go over how you can make that big step into bank financing.

3 Case Studies – When to Use a Hard Money Lender Instead of a Bank

We work with people who have been doing the investing game for 10 to 15 years… who still utilize hard money whenever they need it. Here’s what three of those people do and how they use hard money vs bank loans.

Mary: Cross Collateralizing with a Hard Money Lender

Mary is a developer who builds big homes here in Denver – anywhere between $2-4 million.

She has bank financing set up for the majority of the construction period. However, when she finds a lot or house she wants to scrape, it usually needs to close within 7-10 days. Her bank funding can’t work that fast.

So, she comes to a hard money lender to get the property quickly and with 100% financing. She cross-collateralizes (aka, uses her other properties) to make sure she gets full funding with us.

Once the property is approved through zoning and everything, her bank funding kicks in to pay off the hard money loan.

Jeff: Hard Money Lender a Solution to a Bank Limit

Jeff is a flipper who does about 4 or 5 projects per year here in town. They’re pretty good sized, ranging from $400k to $800k.

But his bank sets a limit, and he’s only able to do about two flips at a time with them. So when he has two projects going but finds a great deal, he’ll go to a hard money lender. Hard money frees him up to jump on a good property, even when his financing is tied up elsewhere.

TC: Hard Money Lender Is Faster Than a Bank

TC has been a longtime client of ours who also uses other financing too. He came across a deal where he was one of five bidders. On the very first day, he bid $30,000 less than everyone else because that’s what would fit his budget with construction and everything.

And he won the deal. Why?

Because he could also close in less than 10 days with a hard money loan. He didn’t need an appraisal, inspection, or anything else that prolongs the sale and gives sellers a headache.

Using a hard money lender instead of a bank was the only way he was able to get that property for 10% less.

You Need Both!

It’s not either hard money or bank loans. You need to use both.

At the end of the day, bank loans are almost guaranteed to be cheaper with interest rate and points. They should always be used when possible. But sometimes bank loans aren’t realistic – you need money now, or you lose out on a great deal.

Banks:

  • Cheaper, lower interest rates and fees
  • You get the entire loan upfront
  • Require a good credit score
  • Take longer upfront (closings can take 2-6 weeks or more)
  • Necessary for long projects

Hard money lenders:

  • More expensive, higher interest rates and points
  • Can take longer in the middle of the project to get funds from escrow
  • Lenient on credit
  • Fast closings (sometimes within days)
  • Flexibility
  • Great for short-term projects

Hard money lender vs bank? They both need to be valid funding options in your career.

How to Get Bank Loans for Real Estate Investing

It may be important to keep hard money in your back pocket, but you should always be moving toward acquiring bank loans. This cheap, long-term funding will fuel the majority of your career.

Here are the steps you need to take to make the leap from hard money to bank funding.

1. Be In Business for 2 Years

You need at least one of the following for bank loans:

  • A W-2 job that meets the income requirements (aka, investing is a side gig for you and you make plenty of money elsewhere).
  • Your business has been established for 2 years or longer.

If real estate investing is your full-time job, then you need to show that you have experience and income from it. In that 2-year span, you will want to complete at least 3 successful projects.

2. Have a Good Credit Score

Bank loans are highly credit score-driven. You’ll need a score of at least 680, but higher if you want better terms. This is something you should be working on now so it’s ready when you really need it.

If you struggle with your score because of credit usage from your business, check out this article for a solution.

3. Down Payment Funds

This can be a major obstacle for newer investors. Luckily, you have a lot of options for help with the (usually 20%) down payment for bank loans:

Find Investor-Friendly Banks

One last tip on the journey from hard money to bank loans: find the banks that like to work with real estate investors.

Most of the large banks, like Chase and Wells Fargo, will only work with a very, very select few investors. Instead, you should look at local banks and credit unions that offer investor loans.

Don’t bother barking up the wrong tree. Find a lender who wants to help real estate investors. As you move through your career and get your experience, start reaching out to find the banks in your area that love to work with investors. 

Need a Hard Money Lender vs a Bank?

Need a quick close, gap loan, bridge loan, or a fix and flip loan? Reach out at Info@HardMoneyMike.com. 

We can help you find unique funding that’s outside of the banking box.

Happy Investing.

Private Money vs Hard Money: Is There a Difference?

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There’s no technical difference between private money vs hard money… Or is there?

As a real estate investor, one of your main goals is to get the best leverage possible. You want lower down payments, interest rates, and fees.

But who’s going to give you that best leverage? Private money lenders, or hard money lenders?

In fact, is there a difference at all between these two lender types? Let’s take a look at private money vs hard money and see who you should go to for the best prices.

What’s the Difference Between Hard Money & Private Money?

Firstly, what’s the difference?

Here’s the thing: private money loans and hard money loans are usually used interchangeably. There’s no clear-cut definition between them.

Both types of lenders ultimately do the same thing – they lend money based on an asset for real estate investing.

Okay, But What’s the REAL Difference?

Although private money and hard money are the same concept, each word has different connotations in the real estate investment community.

We’ve found that people typically associate local lenders with hard money. And they consider capital corporations – the capital funds off Wall Street – private money lenders.

Again, we’re doing the same thing. We’re lending money based on an asset for real estate.

So why are we making such a big deal about the difference? Although they’re the “same” thing, the requirements and costs of each type of money can be vastly different.

Let’s look at what we’ve found about the experience of a private money lender vs a hard money lender.

The Hard Money Experience

People tend to have a poor perception of hard money. They assume hard money = loan sharking. That hard money lenders will get you into a bad deal just for the sake of profiting off you.

The reality is quite the opposite.

Local hard money lenders make money when you make money. They want you to be a successful investor.

Therefore, hard money is flexible in the type of deals they’ll look at and the type of help they offer. They’ll do gap funding and second positions; they may offer bridge loans for saving flips that have gone bad. They’re not strict on credit score requirements, and they often don’t even require an appraisal.

The Private Money Experience

Typically, Wall Street private money lenders are “box” lenders. That means anything that doesn’t fit in their box, they will not do.

Private money also tends to be a bit pricier. We’ll share a story to describe this.

Mike did a group meeting for a real estate investor in Boulder, CO. He went over the hard money loans that we could do. At the end, someone brought up the common question: “What’s the difference between hard money and private money?”

The organizer of the event stepped in. He said, “I’ll tell you what the difference is. I used a capital company. I used someone from Wall Street.” And he shared their terms.

And guess what?

He was putting 5% more down than a hard money lender would require. He was paying a 1% higher interest rate and over $1,200 more in fees. …All because he wanted to be able to say he was working with a capital fund private lender.

We see clients who share a similar story. People lose money on projects by not looking at the exact costs and opting for the bigger name instead.

Which Is Better – Private Money or Hard Money?

So, to determine what’s best for you, you need to look at all the numbers.

  • How long will each loan take? How much will a slow close cost you?
  • What do you need to put for a down payment?
  • Do I meet the credit score requirements?
  • What are the rates?
  • What are the fees/points?

Invest by the numbers, not by the names.

To make this part of the process easier for you, we have a free loan optimizer download for you. For your next project, do this:

  • Go to three different lenders – a mix of private and hard money. 
  • Get all the numbers from them for what they’ll offer on your deal.
  • Plug those numbers into the calculator.
  • Compare the final costs the calculator gives you to determine the cheapest loan.

Why do you have to be so rigorous with numbers? When it comes to private money vs hard money, the cheaper option up front often isn’t the cheaper option overall. The lender with lower interest rates might slip in more junk fees. The one who charges zero points could have upwards of 12% interest rates. The only way to find the best loan for your deal is to use a tool and do the calculations.

I Might Want a Loan

Need a real estate loan? We want you to get the best one possible. Leverage makes your real estate world go round, and the cheaper you can get it, the more successful your business.

Reach out to us with a deal at Info@HardMoneyMike.com.

For more real estate investing resources, check out the videos on our YouTube channel.

3 Ways Banks Trap Real Estate Investors in Pricey Loans (and How to Get Out)

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Credit, banks, and real estate investors: 3 traps and how to avoid them. 

As a real estate investor, you always want to minimize costs. This includes the costs of the money itself.

However, banks can trap real estate investors into paying more than they should. You could be paying 1-4% more in rates, 5-10% more on down payments, or could even be denied altogether.

These three traps all come back to what we call the usage circle. Let’s talk about what the usage circle is and how it affects real estate investors.

The Usage Cycle: How Banks Trap Real Estate Investors

Here’s how the usage circle goes:

  • A real estate investor uses their credit cards to keep a project going. They pay for materials, labor, expertise, and more on their cards.
  • They will pay the card off after the real estate transaction. When they close or refinance a deal, they’ll wipe the card back to zero.
  • But while they’re using the card, their credit score will drop. When they pay off the card, their score will go back up.
  • Banks still use the current, low credit score when they give you the loan.

And there’s the trap.

Using credit to buy the stuff that keeps your business going pulls down your credit score. But with a bad credit score, you can’t get the loans to keep your business going.

How Credit Usage Impacts Loans

Usage makes up 30% of your FICO credit score. When an investor is using a lot of their available credit, their score takes the hit.

The difference between a 679 and a 680 score can mean the difference between getting a conforming conventional investor loan or getting declined.

You’ll pay off your credit once you sell or refinance your investment property and your score will go back up. Banks know this, but they can’t take it into account. They have to use your current credit score when you apply – even if it’s only low because of high usage on business costs.

Here’s how banks leave real estate investors trapped in this way.

1. Higher Interest Rates or Loan Costs

If your credit score is down due to high usage, you’ll end up paying an extra 1-4% either on your interest rate or loan costs. On a $400,000 project, this can add up to an extra $4,000 to $16,000 just for one transaction.

2. More Money Down

Banks may require you to put down 5-10% more on a property if your credit score is low. On a $400,000 transaction, this means you’ll have to bring an extra $40,000 out of your pocket. This unexpected cost could prevent you from doing the deal in the first place.

3. Loan Denial

Banks may decline a real estate investor’s loan if their credit score is even just one point below the bank’s guidelines. If you can’t get a loan, you’ll be locked out from getting a rental property, flip, or other investment opportunities.

Solution to the Banks’ Real Estate Investor Credit Problem

The credit score usage trap is real. It happens to almost 80% of the clients that we see.

The solution to avoiding the credit score usage trap is simple: stop using your personal credit cards for business use. If your credit usage is in your business’s name, then it won’t impact your personal credit score.

Here’s the method we recommend.

How to Move Your Credit Usage from a Personal to a Business Credit Card

If you have an LLC set up, you’re already working as a business, and your usage is impacting your personal credit score, then you can move the debt.

You can pay off the credit card balances using a private loan. This usually looks like having a family member or friend provide the funds.*

Then, you let the credit cycle through 30-90 days to allow your score to go back up. Once your score is settled, you can apply for a business credit card and move the balances over.

*If you don’t have someone you can ask for a private loan to do this, reach out to us. We do this type of loan all the time for our clients. We don’t want credit to be the reason you can’t flourish in your real estate investing career.

Stop the Banks’ Usage Cycle Trap for Real Estate Investors

It’s important to choose the right credit card. Some business cards do still show up on your personal credit. Do not choose this card – it defeats the whole purpose!

Not sure which card to pick? We have a link on our website to a business card that we use ourselves and highly recommend. If you get it, we’ll give you $250 off the next loan you do with us.

Tricks and tools like this are what set apart successful investors. Don’t let credit and banks trap you in pricey loans!

Happy Investing.