As real estate investors, we hear about hard money all the time. Eric, what's hard money and how do I use it?
Hard money, wow. Hard money to me is hard for me because it's typically going to be a higher interest rate. It's hard for me because it's going to cost me more in points and fees. That's going to cut into my profitability. That's why it's hard for me. But it's a tool to use. Just because I say it's hard for me, I want you to be profitable as well. Know that it's a tool, just like any of the other financing tools. You want to learn how to use it effectively.
Now, I know individuals who only use hard money and they are entirely successful. They make it work for them. And that's their strategy. But let's understand what hard money is first.
A hard money lender is either a group or an individual; they have their own individual lending criteria. They may have a specific LTV that they loan against. LTV means low to value btw. Maybe they will go to 80% or 90%, or some hard money lenders will even go to 200% of the value, including your fix-up cost. That could be a really cool thing.
Now there's a couple of things you want to watch out for in any loan. What is the interest rate? How important is the interest rate, if we're getting a 6% interest, or a 10% interest. On a three month loan. It may not be massively important, but where it may come into play is, what are the fees we are getting charged? What are the points, what are the appraisals, and what is the underwriting? What does all that look like?
Is hard money a fast or slow option for funding deals?
Hard money means you've got access to funds. Usually, it's meant to be a quicker process and a faster scenario. And one of the places that I like to go to as far as a tool that you may want to check out as well. I've used it for years as a lender and it's called Scotsman guide. Scotsmanguide.com you can check it out. They do have it setup by hard money lenders by state. You can check that out. It's a great resource.
Now hard money lending, let's dig a little deeper into it with regards to rate of return. With anything, first look to get the lowest cost loan, but you also want to make sure that you have: if you've setup a track record often with a hard money lender, they will say OK, on the first deal, we'll charge you two points and the loan will be at 10%. We'll charge you one point on the second deal, which is one percentage point of the actual loan amount, and maybe they will say 8% interest rate. Now that means they are telling you that they are flexible out of the gate.
Does that mean you as an investor can negotiate with any lender at any time, to get a better interest rate or negotiate on the points and fees? You bet it does. And you better be asking them to reduce those costs and those fees to be able to go ahead and maximize your return. So pay close attention to that. Just like getting the best rate that you can in real estate when you purchase, you also want to get the best deal you can when you're negotiating how the funding goes. And that will make a big difference to you as you move forward with hard money. So again, hard money, don't shy away from it.
Can you sum up for us the benefits and drawbacks of hard money lending?
So you might say Eric, that seemed kind of bad with your initial approach. Ooo, it's hard. No, hard money is just different. It's not good or bad; it just depends on how you use it. And is there a better tool that you could use. But I would definitely recommend hard money as one of your funding sources moving forward. So get more educated about it, get a couple of hard money lenders in your back pocket so that you're ready to move on deals. That way you know what to expect so when you're running your numbers that way you can actually determine your profitability, including your lending cost. That's when the funding part will be fun for you. It really will turn into a positive thing. Hard money, excellent way to fund deals, excellent opportunity. Add it to your toolbelt.