What is Hard Money Lending?

Investors often consider using “hard money” or funds from private sources to secure funding for investment opportunities they are considering.   What exactly is “Hard Money” and when does it make sense to consider using a hard money loan for an investment opportunity.

Hard Money is the term used for loans funded by private parties that cannot be funded by conventional lending institutions. There are many types of hard money loans. Other common names for hard money loans are: private, asset-based, bridge, and interim loans.

While there are many different use cases, investors typically choose to use hard money because:

a.) They require a quick closing and their bank can’t make the deadline.

b.) They have an excellent investment opportunity but don’t have sufficient financial strength to get a bank loan.

c.) They need more leverage than a bank is willing to give.

d.) The property needs to be renovated or stabilized before a bank will agree to permanent financing at traditional rates.

Private lenders generally make lending decisions based heavily on the project’s Loan to Value (LTV) ratio. In addition to the LTV, the Loan to Cost (LTC) ratio is considered. These ratios measure the risk of the loan by comparing the loan amount to the cost of the project and the value of the asset at the time of the purchase.  The After Repair Value (ARV) or value of the property after it is renovated/improved is also considered.

Private loans are considered for:

-Fix & Flip loans which provide financing for the purchase and rehab of non-owner occupied residential and multi-family investment properties.

-Alternative Fix & Flip loans are also considered to provide financing for the rehab of our other assets such as vintage automobiles, RVs, and boats

 -Bridge Loan programs provide investors funding for the acquisition and refinance of residential, multi-family, mixed-use, and commercial investment properties. Bridge loans usually are used for approximately 12 month period while the investor prepares for refinancing.

-Refinance or Cash-Out programs allow investors to use the equity in a property they already own for refinance, rehab, or improving their property. Or just to take cash out.

-New Construction loans can get you the financing you need to cover the cost of the building process.

Private Loan Rates are generally fixed, but can vary slightly depending on the borrower and the specific project. The Interest rates for private loans are higher than for traditional  loans, however the loan term is much shorter. It is always wise to consider the actual dollars that will be paid during the term of the loan, rather than the APR.

Private loans generally include a charge for originating the loan referred to as “points”. Points are calculated as a percentage of the loan amount and can range between 2-5 percent of the total loan amount. The actual points charged on your loan will depend on the loan-to-value (LTV) ratio of your deal, the interest rate charged, and the risk associated with the loan. Other fees can be included for processing and underwriting as well such as a fee to process the loan application, acquiring documentation in order to underwrite the loan and property appraisal by fees. 

 

PRIVATE  LENDING TERMS YOU SHOULD KNOW

INTEREST RATE

The periodic charge (typically paid monthly in arrears), based on a percentage of the amount of money borrowed, for use of money lent to a borrower by a lender during the term of the loan.

POINTS

Fees paid to a lender to make a mortgage loan. Each point is equal to one (1%) of the principal amount of a loan.

HARD MONEY

A common expression for money lent by private lenders, secured by an asset (most often real estate) at rates which are typically higher than rates charged by banks due to the greater risks associated with such loans.

BRIDGE LOAN

A short-term loan which is intended to provide financing to cover (or bridge) a period of time to allow a borrower to purchase and/or renovate and repair and/or stabilize a property prior to reselling/refinancing/renting or otherwise utilizing the property for the borrower’s intended purpose.

LTV

The Loan To Value ratio is the percentage amount of a loan as compared to the fair market value of a property which is being pledged as collateral for a loan. For example, if a borrower is purchasing a home worth $100,000 and the lender is willing to loan a maximum of 70% towards the appraised value of the home, this would translate to a $70,000 loan and a LTV of 70% ($100,000 X 70% = $70,000 --- $70,000/$100,000 = 70% LTV).

ARV

After Repair Value is the value of a property after renovations, repairs and/or retrofitting has been performed. ARV is an important factor which lenders take into consideration when making a loan in fix and flip and construction loan situations.

LTC

The Loan To Cost Ratio, is the percentage amount of a loan as compared to the actual purchase price paid by a borrower to acquire a property. For example, if a borrower is purchasing a property worth $100,000 for a discounted purchase price of $90,000, and the lender is willing to loan a maximum of 70% of the LTC towards the purchase price (cost) the loan would be $63,000 based on LTC instead of $70,000 based on LTV. Some private lenders will lend money based on a maximum LTC rather than based on a maximum LTV.

CASH OUT

A type of loan in which a property owner borrows money secured by a mortgage on the equity in the property to utilize in connection with a purpose not directly related to the property being mortgaged.

PER DIEM INTEREST

The daily interest payable by a borrower on a loan. Assuming a loan closes or is paid off on any day other than the first day of a calendar month, this amount is charged by a lender to a borrower in the month in which a closing on a loan occurs.

PRE-PAYMENT FEE

A fee paid to a lender for paying a loan prior to the scheduled maturity date.

CAP RATE

“Cap Rate” or “Capitalization Rate” means the ratio of income to value.  In other words, cap rate is the expected return on investment to the purchaser of an income producing property based on the amount of money paid to acquire a property as compared to the annual net income realized by the investor/purchaser of the property after deducing all operating expenses not including mortgage interest.

TRIPLE NET

This term pertains to real estate leases. Triple Net means that the tenant ispaying rent plus all operating expenses associated with the property being leased (except for the landlord’s mortgage costs and sometimes capital repairs and improvements) A triple net lease typically includes all utilities, real estate taxes, municipal assessments, non-structural repairs and replacements, common area maintenance such as snow removal,landscaping costs and cleaning.

NET OPERATING INCOME (NOI)

This is the annual net income which a property owner realizes after adding all rents and other income from ownership of the property and subtracting all expenses of utilities, real estate taxes, maintenance and repair of the property (excluding mortgage amortization expenses).

 

If you would like to learn more about using private lending for real estate investment opportunities, the InvestBlue Division of The Vanderblue Team is here for you.  We are happy to talk with you and connect you with our trusted professional private lending partners.  For more information call Laurie Quatrella  at 203-615-3301 or you can email Laurie at [email protected].

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