In this article we will be discussing the secrets of Hard Money Lending that you will need to know before diving into this type of loan. Hard Money Loans are a temporary bridge loan that you get from
a private investor to help you obtain a piece of property or to rehab a property that you intend to fix and flip until you secure a more permanent loan or sell the property. You need to make sure you do
your homework before you take on this type of loan. Knowing exactly how these loans work will help you set up a plan of attack. By learning everything you can about a Hard Money Loan before you go into a
meeting with a lender, you will be more prepared and have an understanding of how these work. The more you know, the more it will only help you. Also, make sure that when choosing a lender, you do your homework on them.
Try talking to someone who has used them before or google them to get all the information you can. Make sure to read everything you can on the business as well as any customer feedback that may be available to you. There are many things you need to keep your eye out for when applying for one of these loans and we are going to talk about them in this article.
Hard Money Secret #1: Hard Money Interest Rates
One of the first things you need to consider when taking out a Hard Money Loan is how much interest you are going to incur on pre-draw rehab funds. Almost all Hard Money Lenders want these draws to be made
after the the job if finished. A lot Hard Money Lenders do not advertise this so you need to make sure you search around before settling on one to use. If you don’t shop around for competitive quotes it could
end up costing you thousands of dollars. Always make sure you know about every single unadvertised charge because this will only protect you and your money. A lot of Hard Money Lenders will try and tell you that
charging full interest on pre-drawn money upfront is common, but this is where you need to do your research and find one that doesn’t.
When dealing with Hard Money Lenders you need to understand that this is a risk and relationship based business so make sure that you negotiate for what you want. In order to be prepared you need to do your homework before going into a meeting. You need to understand how this business is ran. Hard Money is usually a big pot of investor money.
Hard Money Secret #2: Some Fees Can Be Negotiated
They use the SEC guidelines and raise money as well as using private offerings. Not many Hard Money Lenders will use their own personal funds for this. When money is lended, there needs to be clearly defined returns. The monthly interest rates are guaranteed to go directly to the investor. There will be an origination fee that will go to the person or company doing the marketing and operation. Normally this fee will be 3% of the loan that will be paid upfront but this can be negotiated based on your knowledge and experience. Establishing a good track record is key to being able to negotiate this fee. So having a couple of these transactions that went smoothly under your belt will be your ticket to negotiate.
For every Hard Money Loan after your first couple, as long as you have a good standing track record, you will be able to ask for a discount on the origination fee. Since this is a risk and relationship based
business, they should be willing to work with you because you will be considered a lower risk. Having a good track record will also give you grounds to negotiate a payment plan with your lender. Since Hard Money Lending is done by private investors they are more willing to work with you on a payment schedule, where with a normal mortgage it is set in stone. Always keep an open line of communication with your lender so they know that you are meeting your deadlines and are on schedule. If by chance you can’t meet a deadline or a scheduled payment, call your lender and let them know. Normally, Lenders will grant extensions as long as there is a valid reason for it and they are kept in the loop about what is going on. This will only help you out in the long run by building a trusting relationship with your lender. That way they will continue doing business with you in the future.
Hard Money Secret #4: Each Lender Will Have Different Rates
Keep in mind that interest rates charged by Hard Money Lenders will be different from lender to lender and it will also vary location to location. Hard Money Lenders in big cities will generally have lower rates than Hard Money Lenders in small cities because by having more Hard Money Lender firms in the bigger cities they will compete against each other to offer the lowest interest rates possible in order to get your business. With a Hard Money Loan there is more risk involved than with a regular bank so, the interest rates will be higher than normal. Interest rates will range from 10% to 15% for a Hard Money Loan so make sure you shop around for the lowest rate you can find in your area. In bigger cities you may even be able to find rates as low as 8% if you get lucky and find businesses competing against each other.
That is why it is so important to shop around and not just settle for the first one you come across because that could mean hundreds of dollars in savings for you. Also, repaying this loan as quickly as you can will be key in saving you hundreds if not thousands in interest fees. Each month you have this loan out, more interest fees tack on making the total payoff grow and if you want to make money off of the property, you need to get the hard money loan paid off as quick as you can.
Hard Money Secret #5: Your Mortgage Interest is Tax Deductible!
Did you know that you have the ability to get a tax deduction on your mortgage interest? Not all Hard Money Lenders will let you know this. When looking for a lender ask if they give you a 1098 tax form every year. If not, look for a lender that does. Having a 1098 form when you file taxes can mean a serious deduction for you. Normal rehabbing on a home can cost between $20,000-$30,000 per home. If you were to do three houses in one year with hard money loans of $100,000 per house paying an interest rate of 14% per house for a period of three months on each house, you are looking at a tax deduction of $10,500 for the year. That is $10,500 worth of tax deduction that some lenders don’t want you to know about. I cannot stress enough how much you need to research to make sure that you get the best possible deals you can when
applying for a Hard Money Loan.
Do you know any friends or family that are looking to become private lenders to help you start your business? If so, then you won’t have to go through a lender and you can avoid an origination fee all together. When borrowing from private lenders many of them are happy to agree to receiving between 5% and 10% interest. So once your project is finished and you have sold the property, you would then pay the private investor back the money you borrowed plus the interest that you have agreed upon. This method really can work, you just need a large network of friends or family that would be willing to go into business with
It is very easy to get this set up. All you need to do is go to your local title company and they will be able to draw up the loan documentation you need with a simple lender-borrower agreement for only around $400. That way you are protected as well as the person investing the money to give both sides piece of mind.
With all of the information we have provided in this article, we hope it provided you the knowledge you need in order to consider getting a Hard Money Loan and the confidence you need when talking to a lender.