Hard money is a commercial loan offered from private sources, typically directly by individual investors seeking to put their money into higher-yield investments, or private companies that match such investors with borrowers.  Hard money lies far outside the constraints of conforming or qualifying mortgage loans, leaving almost complete freedom to the lender or investor when it comes to dictating requirements.

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Hard money lenders tend to place far more emphasis on the suitability of the subject property as collateral rather than your qualifications as a borrower.  Indeed, should the property be attractive enough whether before or after repair, and the LTV ratio fall in line with their specifications, lenders or investors may not care if you default.  The ability to seize the subject property as collateral protects the investor, much like a lender is protected in a traditional mortgage loan.

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While most hard money lenders look for protection by only offering financing with low LTVs, likely requiring you to bring a down payment of 25% or more (or in the case of refinance, having equity equivalent to 25% or greater), we work with several hard money lenders that make exceptions to these rules.  These partners can offer as low as 10%-15% down for purchases, or refinances up to an equivalent LTV, depending on your experience level as an investor.  If you are completely new to investing in real estate, you may be expected to remain at a lower LTV.

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Hard money financing has become an integral tool in fix and flip investments.  Hard money lenders, unlike traditional lenders, will finance the purchases of distressed properties.  When positioned in the right area, or just purchased at great enough of a discount, even a property in disrepair can yield significant profits after repair is completed.  Let's say you locate a distressed property and believe that various aspects, whether its location or the price you believe you can negotiate, makes it an attractive investment opportunity.  However, its condition would bar you from utilizing conventional or government financing in any way. Hard money may be an effective solution.

 

    Hard money is interest-only (though nothing is stopping you from making larger payments to go towards principal), and is a short-term loan typically ranging from months to a few years in duration.  Therefore, it is very important to ensure that you have an exit strategy carefully planned before committing to hard money financing. 

 

The most common exit strategies are either the sale of the home for a solid profit, or refinancing the hard money loan into a traditional long-term mortgage once the property is fully repaired and passes appraisal.  You will want to make sure that the property's After Repair Value (ARV) will be high enough compared to the acquisition cost to cover not only the hard money loan, but the costs of your repairs as well. 

 

A common rule to operate within is to ensure that your purchase price does not exceed 70% of the property's realistic ARV, with the expected cost of all renovations and repairs subtracted from that value to be even more careful.  For example, if a property's ARV will realistically stand at $100,000 after careful comparisons to similar homes that have recently sold in the same area, and your total renovation costs for labor and materials amounts to $20,000, you should purchase the property for no more than $50,000.

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If hard money financing will aid your real estate investment strategies, please reach out to us for a free consultation.