Hard Money Loans for Real Estate Investors

Bonus Module

Hard money loans are short-term loans from professional lenders or companies that specialize in real estate investment financing.

For more information on financing—including hard money loans—check out the full financing module:

Use Cases for Hard Money Loans

Hard money loans are typically used in situations where speed, flexibility, and access to capital are crucial. They are ideal for investors who need quick financing for deals that traditional lenders may avoid. Let's explore some common use cases for hard money loans in real estate investing:

Short-Term Financing

• Fix and Flips - Hard money loans are perfect for purchasing and renovating properties to resell for a profit in a short period. Traditional lenders may not approve loans for properties in poor condition, but hard money loans can provide the capital needed for rehab projects. Hard money loans are not typically used with owner-occupant variations of fix and flips like live-in flips or 2-year tax-advantaged live-in flips because hard money lenders are used to making commercial (non-owner-occupant) loans and usually don't want to deal with consumer lending regulations, which are very different.

• BRRRR (Buy, Rehab, Rent, Refinance, Repeat) - You can use hard money loans for purchasing and rehabbing properties, then refinance into a long-term loan after the property is rent-ready and, usually, has a tenant. This strategy allows you to quickly acquire and improve properties, build equity, and then transition to more favorable long-term financing.

• Auction Purchases - Fast approval and access to capital can make some hard money loans a go-to for buying properties at auction. In many markets, you may be required to put up money at the time of the auction. This makes it more difficult to utilize hard money loans at auction. It may be an uncommon niche offering by some hard money lenders or something utilized by experienced investors that have strong relationships with their lender who are willing to provide them with certified funds to buy properties at auction. They may secure the loan against the property later or may secure the loan against other assets of the investor.

• Wholesaling and Double Closings - Quick access to capital makes hard money loans useful for double closings or short-term wholesaling deals. This can be particularly helpful when you need to close on a property quickly before reselling it to an end buyer.

• Bridge Loans - Hard money loans serve as an excellent solution for bridge financing when transitioning from one deal to another, especially when waiting for proceeds from a sale or conventional loan. You may choose to buy an amazing deal you can't pass up, knowing that you're about to put another property you own on the market and the sale proceeds from that property will allow you to utilize longer-term financing on the amazing deal. Some investors use hard money loans as a bridge between acquiring the property and obtaining long-term conventional financing, especially in competitive markets where fast action is required.

• Land Development - You can fund land acquisitions and early-stage development costs with a hard money loan. This can be particularly useful for investors looking to develop raw land or significantly improve existing properties.

Down Payments for Creative Financing Deals

In some cases, you may be able to utilize hard money loans as down payments for creative financing deals like owner financing. You can put the small hard money loan in first position, perhaps as a 5-20% down payment. Then, the seller agrees to owner-finance the rest of the purchase price.

You could also borrow the fix-up costs in the same hard money loan.

Unlike many of the previous examples, these don't have to be short-term loans.

This strategy can provide you with more flexibility in structuring deals, especially when working with motivated sellers who are open to creative financing options.

Specialized Properties

Hard money loans can finance unconventional or unique properties that traditional lenders may shy away from. This flexibility allows you to pursue opportunities in niche markets or with properties that require significant renovation. Examples might include:

• Mixed-Use Properties - Buildings that combine residential and commercial spaces.

• Non-Conforming Properties - Properties that don't fit standard lending criteria due to their unique features or condition.

• Distressed Properties - Properties in need of major repairs or renovations that conventional lenders might consider too risky.

Costs to Get Hard Money Loans

There are costs associated with getting hard money loans.

Let's look at some of the more common expenses you'll encounter:

Points

Hard money loans often come with points—a type of upfront fee paid to the lender. Points are typically expressed as a percentage of the loan amount.

• What Are Points - Points are essentially a fee that lenders charge for originating the loan. For example, if a lender charges 2 points on a $100,000 loan, that's 2% of the loan amount, or $2,000, due at closing.

• Financing the Points - Some hard money lenders may allow you to finance the points into the loan by adding them to the loan principal. This means instead of paying $2,000 upfront, you'd add it to the loan balance, making the new loan amount $102,000.

• Paying Interest on the Points - When you finance the points into the loan, you'll pay interest on the entire loan amount, including the points. In our example, if you financed the $2,000 in points, you'd be paying interest on $102,000, not just the original $100,000.

Origination Fees

In addition to points, some hard money loans come with origination fees, which are one-time charges for processing the loan. These typically range from 1-3% of the loan amount.

Closing Costs

Hard money loans often incur closing costs—expenses associated with finalizing the loan. These can include fees for title insurance, recording fees, appraisal fees, and other administrative costs, usually ranging from 1-2% of the loan amount.

Interest Rates

The interest rates on hard money loans are typically higher than those of traditional loans, often ranging from 8-15%. Sometimes more; rarely less. Rates often depend on the lender, the risk of the project including loan-to-value, your experience as a borrower and your ability to negotiate based on supply and demand for hard money loans.

Application Fees

Some lenders charge an application fee to cover the costs of processing your loan application, which can vary but is generally a few hundred dollars.

Prepayment Penalties

While not super common, you may have a pre-payment penalty on your hard money loan to ensure you keep the money out for a minimum period of time. Check for any prepayment penalties that may apply if you pay off the loan early, as these can significantly affect your overall costs.

Inspection Fees

If your project involves significant renovations, some lenders may require inspection fees for appraisals or progress checks during the rehab process.

Late Fees

Be aware of late fees that could apply if you miss a payment deadline, which can vary by lender.

Miscellaneous Fees

Inquire about any miscellaneous fees that might apply, such as processing fees, draw fees when money is released or fees for drawing up the loan documents.