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How’s everybody doing? We’re basically only a week away from Thanksgiving you guys! That’s nuts!
This year has been a blur, for real. But it’s been one heck of a blur.
Today I want to touch on something that I am very much an expert in, hard money loans.
For those of you who don’t know I’ve actually started and run two debt funds in the past and it’s come to my attention just how many people don’t understand the intricacies of these transactions.
So buckle up, we’re getting to it!
Lenders and Speed
Let’s start at the beginning, let’s say you’re trying to acquire a home for $400k at an auction, with the intention of flipping it.
*Side note, for the sake of this article I’m going to rely on hypothetical real estate examples, but it really applies in any field you’d like.*
Unless you have $400k that you can casually bring to the table, you’re going to need some sort of exterior funding.
A traditional approach with a bank is not going to work, it’ll take too long and will have too many complications.
And in enters the hard money lender.
These guys can provide you with quick and efficient access to capital that can help you move forward in a purchase of something similar to this example.
Hard money lenders can get you your money in as little as 3-5 days, which is essentially unmatched by anything short of your own capital. They truly specialize in speed.
Terms
Now, you may be thinking to yourself, what is the catch here? And that’s good, because there are some haha.
It’s called “hard money” for a reason.
First off, hard money lenders are almost always looking for quick deals. You’re very very rarely going to find someone that will agree to a deal that lasts more than a year.
So right off the bat there’s some time considerations to take into account.
After that you’ve got positions. This is most relevant in real estate, for example, when you acquire a home there are provisions put in place in case of a crisis. These provisions take the shape of the first mortgage, second mortgage, etc.
This basically provides an order by which people, or groups, are paid out if the home goes into foreclosure, or is sold.
So these positions are what determines that order, and hard money lenders will almost always require being the first position on a deal. Not the end of the world, but something to bear in mind.
Third, you’re looking at interest. The interest on these loans is going to be higher than one from the bank, usually ranging between 10-15%.
Lastly, the majority of lenders ask for a given amount of “points” just to get the wheels moving. Think of this as upfront fee.
Using the example I gave above of the house going for $400k, let’s say the lending company wants 3 points to begin the process.
That’d mean before any of the other terms have taken effect, you owe them $12k, just for their trouble.
Now you see why people can be a little wary of these fellas.
Sky High View
So look, you’re probably not feeling all that swell about our friends with the money.
Their terms can be tough, but are they so tough that it’s not worth it?
The answer… varies haha.
It depends on your deal, but anything with an expected return of more than roughly 20% will still make you money.
What I always tell people is would you rather have 80% of something, or 100% of nothing.
I think the answer is obvious.
Any who, that’s all I’ve got for you guys today.
I want you to take into consideration all the factors you’re dealing with with lenders, but also know that it’s often through them that you’ll be able to get the deal done.
Happy capital raising everybody!
Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
