Housing prices are still on the rise, which means there’s plenty of opportunity to make money through fix up and flips.
But to generate a profit, you may need to do some significant work to the property. These projects can be expensive, and you may not have the cash to cover the purchase and the rehab. Even worse, the best deals happen quickly. Once you find an opportunity, you need to jump on it fast before another investor gets it, so conventional financing isn’t going to work here. That’s where Hard Money comes in.
What is Hard Money
First, if you aren’t familiar with this term, Hard Money refers to lenders who typically provide financing with lower down payments, and quicker turnaround, but at a higher cost. They still have qualifying requirements, and do underwriting, but they are set up to fund investors. If a wholesaler brings you a deal, and you need to close in two weeks, if you don’t have the full amount you need in cash, you go to a Hard Money lender.
Some of the Players
With a strong economy and growing real estate market, Hard Money lending is easy to find. There are several big name players out there, and lots of small and growing firms joining the market. Here is a sampling of some the lenders out there.
One of the biggest names in the Hard Money space is Lima One. This company has a good reputation for moving quickly and closing on time. They’re expensive, charging up to five points up front for the first deal, but the costs come down the more deals you do with them.
Lending One is another bigger player in this space. They offer competitive terms, with funding for up to 90% of the purchase plus rehab. One word of caution though, they may be going through some growing pains. But, they offer attractive terms, so it may be worth a little hassle to get the deal done.
Another lender with attractive terms is Angel Oak. They offer a deal that is up to 90% of the purchase and 100% of the rehab costs, plus we’ve even been told they will wrap the closing costs into the loan. If you’re trying to stretch your cash, this can be an attractive way to go.
Sherman Bridge deals will require more cash up front than say an Angel Oak, but they move quickly and efficiently. If you absolutely need to close in less than two weeks, this might be a good alternative to Lima One.
Terms to Consider
Here are some of the terms you should consider when choosing a lender.
Interest rate- most Hard Money loans are interest only, at rates that typically range around 8-14%. A double digit interest rate might seem scary at first, but remember, this is short term. And, those terms will typically improve as you complete more deals.
Points- A point is a fee the lender will charge as one percent of the loan amount. And the number of points they charge can make or break a deal. For example, if you are taking out a $400k loan, and the lender is going to charge 5.5 points, that is $22k in lender fees, on top of all of the other expeneses. At 3.5 points, the same deal only costs 14k. That’s a huge swing in costs, and could make a deal no longer feasible.
Again, some lenders charge higher points on your first deal or two, and then reduce that over time. If you’re just starting out, do a couple smaller deals early to build up some history. And then, when you’re ready to do a bigger deal, the terms will be much more attractive.
Term- It used to be that most Hard Money lenders would only offer a term of six months. When you’ve got a project that takes two to three months to complete, 90 days is not a lot of time to market, sell, and close on the sale of a property. A lot of investers found themselves up against the wall and having to refinance at the last minute, wiping out any profit they had left in the deal. Now, most but not all lenders will usually offer a twelve month term.
While Hard Money doesn’t require they same level of underwriting or qualifications that convetional financing does, you should still be prepared to demostrate an ability to repay the loan. A decent credit score and sufficient reserves (including enough to cover carrying costs for six months), is usually all you will need. But this is still a lender, so be prepared to provide any supporting documentation that is requested.
Also, due to the differences between commercial lending and consumer lending, Hard Money lenders will only lend to a business entity. If you are planning on using hard money, go ahead and set up and register an LLC with your Secretary of State. You’ll also need to get an EIN from the IRS. Without this, you won’t be able to get the loan, and you can do both of these things yourself without having to pay an attorney or CPA.
Hard Money is a great tool for funding Fix up and Flips. If you’re just starting out, use the advice above to get yourself ready and to be prepared when that perfect deal lands in your lap.