Hard cash loans might not be difficult to come by, but they can be expensive. Despite the cost, they are an indispensable tool for investors. Knowing when to use hard money and how to get it is crucial.
Here is everything you need to know about using real estate hard cash loans.
What is a hard cash loan?
Hard money loans use physical assets as collateral rather than relying on the borrower’s financial history. Usually the property you buy is used as collateral, but other examples are retirement accounts or other real estate that you own.
A hard cash loan is a way to borrow money without jumping through the hoops of traditional lenders. It often has more flexible terms than bank loans because private lenders offer them.
How does a hard cash loan work?
Unlike a traditional lender, a hard money lender is much more interested in the asset than the borrower who is borrowing against that asset. And so, as expected, a hard money loan is usually a lot more expensive than a normal bank loan.
Banks usually have very strict and arduous criteria for conventional mortgages, especially investment property mortgages. This is especially true if you’ve purchased over 10 properties on your behalf and are no longer eligible for a Fannie Mae sponsored loan.
When it comes to owner-occupied real estate, the type of loan that banks are interested in is from the cookie cutter. Most real estate investors don’t make money from exceptional properties, however, so hard money can be extremely useful.
While most of the hard cash is lent for investment and residential real estate, hard money lenders can lend for apartment buildings, commercial office buildings, industrial real estate, retail and even non-real estate items such as property.
At first glance, hard money and personal money loans may seem the same, but they are quite different.
Hard money lenders are effective intermediaries for short-term loans, mostly on real estate.
Private lenders, on the other hand, can be pretty much anyone with money. A personal loan is relationship based; the lender can be a private company or even a friend or family member.
Many investors use hard money as an integral part of their funding strategy – especially those who need loans to fix and flip. It’s a great tool for making money quick if you know how to use it properly.
Advantages and disadvantages of a hard cash loan
Given that hard money lenders are more expensive than banks, it makes more sense to go this route when you can get a bank loan upfront. Traditional purchases or real estate that doesn’t require a lot of rehab are not the best candidates for hard cash loans.
On the other hand, properties that you want to turn around or require extensive renovation are good candidates. This is especially true if you have problems with your credit report or don’t have a W-2 income.
Banks are obsessed with W-2 income. While many will loan out full-time real estate investors, many will not – at least not to anyone without a long, proven track record, which newer investors obviously don’t have.
The pros and cons of hard cash loans depend on your situation, but let’s go through them.
Some of the greatest advantages of using hard cash loans are:
- They are fast.
- The credit check is not as tedious as with banks.
- Borrowers unable to obtain traditional credit often qualify.
- Often times, properties that require too much work for a bank to be interested in qualify.
- They are available when a traditional loan fails while the property is under contract.
That is not to say that there are no downsides to using hard money loans. Some disadvantages are:
- The cost of the loan can be expensive, with high interest rates and various fees.
- It is risky to get into them as your property is a security.
- The repayment periods are shorter.
- Some hard cash lenders are after your money – and lots of it.
More on BiggerPockets’ hard cash
How Much Do Coin Lenders Charge?
As mentioned above, the standard hard money loan terms are expensive. However, since these are short-term loans, they can still be taken out with scope for a healthy profit. While every hard money lender is different, normal loan terms look something like this.
- Loan-to-Value / Loan-to-Cost: 65% -85%
- Loan on rehab expenses: Yes
- Interest rate: 12% -16%
- Points: 2-6
- Other fees (varies by lender):
- Valuation reports / broker price reports
- Title fees
- Registration fee
- Inspection fee
- Document handling fees
- Duration: 6 months to 1 year
- Early repayment penalty: Usually none
Still, the loan amount varies greatly from lender to lender. For example, Taryn Kendrick, president and co-owner of Worcester Financial, based in Kansas City, notes that while many lenders do not charge application or document processing fees. A broker’s Price Opinion (BPO) typically ranges from $ 150 to $ 250, and a valuation can range from $ 400 to $ 650 (or significantly more if it’s an apartment building or commercial property).
The loan amount varies widely from lender to lender and depends on the value of the property. While Worcester Financial spends up to 75% loan-to-value (LTV) or loan-to-cost (LTC), they are willing to lend up to 65% post-repair value (ARV) if that value is higher.
This means that on rare occasions, they have financed 100% of the cost of the property. However, this only happens with particularly good offers. Don’t go into a deal when you expect it to.
And to reiterate, what any hard money lender is willing to do is different. For example, some may be willing to use other assets (e.g., another property) to “back up” a loan. This type of flexibility is another benefit of hard money lenders.
Other hard cash lenders can hit the LTV at 65%, while some can go up to 85%. Remember to clarify whether a lender is referring to the LTV (the value of the property) or the LTC (how much money you are putting into the property).
Regardless, you almost always need to find a way to increase the down payment. Possible sources include savings, a partnership, or a personal loan from friends or family. In certain cases, as mentioned, another free and unique property can be secured across the board with some lenders.
The bottom line is that hard money lenders are generally more flexible than banks, and applicants have a better chance of negotiating changes to terms or repayment schedule with a hard money lender than with a bank.
Discover Coin Lenders on BiggerPockets
Access over 150 lenders who specialize in asset-based lending in the BiggerPockets directory of hard money lenders. Whether you are able to save money or invest in long term rentals – or even need a bridging loan – you can find a hard money lender to suit your needs.
How to get approval for a hard cash loan
For retail investors, the best part of a hard cash loan is that it is easier than obtaining a traditional mortgage from a bank. The approval process is usually much easier. Banks can request an almost endless series of documents, and it can take several weeks to months before they actually receive a loan to the committee. Most hard money lenders can complete a loan in as little as five to ten business days.
It is generally best to develop relationships with lenders before making any offers. This increases the likelihood of a deal being closed as much of the foundations have been laid in front of you to need the money (asap!).
Many hard cash lenders also provide a conditional approval letter that works similarly to a bank’s pre-approval letter that many sellers are required to sign on the dashed line.
Coin lenders still need to fill out a loan application form. They also usually require two more years of tax returns and two months’ worth of bank statements, as well as a list of the real estate you own, a copy of your driver’s license, and the like. They also look at your creditworthiness.
That said, there isn’t nearly as much paperwork or detail as there is on a traditional loan. The main purpose of these things is to ensure that the borrower has an exit strategy and is not in financial ruin. But many coin lenders will work with people who don’t have a lot of credit.
The most important thing hard money lenders will look at is the property itself. Hard money lenders will request a BPO or appraisal to assess the property’s current value or to determine the ARV.
They will also evaluate the borrower’s volume of work and budget to make sure it is realistic. Sometimes they stop the process because they either believe the property is too far away or the rehab budget is unrealistic.
Finally, they evaluate the BPO or review and evaluate the selling and / or rental costs to make sure they are okay with the review.
So it’s not that easy to fill out a form and withdraw funds. But there’s another benefit to this process: you get a second look at your deal, and one that’s invested heavily in the outcome of the project!
When a business is bad, you can be pretty sure that a tough financier won’t touch it. However, you should never use this as an excuse to forego your own due diligence.
It’s also important to note the occasional bad apple among coin lenders (as in any other industry), which we’ll discuss below.
Who is the Best Moneylender?
As with any business, you need to be careful with tough financiers. The most important thing is to check them out the same way you would any other important team member. (They will surely check you out.)
You also need to consider your situation in order to find you the best hard money lender. Is this your first property or are you a seasoned pinball machine? Are you looking for someone who focuses on your needs? Someone quick? Which moneylenders can you afford? Which hard cash giver has the best reputation in your area?
These are some of the questions that you should ask yourself when looking for a lender.
Don’t be afraid to ask for recommendations either. Good lenders will have no problem providing them.
The best place to look for hard money lenders is the BiggerPockets Hard Money Lender Directory or your local real estate association. Remember, if they did right from another investor, they will likely do right from you too.