The Ins and Outs of Personal Hard Money Loans

Personal hard money loans can be a great financing option for real estate investors and homeowners in certain situations As someone who has utilized these types of loans in the past, I wanted to share my knowledge and experience with personal hard money lending

What Are Personal Hard Money Loans?

A personal hard money loan is a type of private lending where an individual or company provides the financing, rather than a bank or traditional financial institution. The loans are asset-based, meaning they are provided based on the value of the underlying asset being financed, which is usually an investment property.

Personal hard money loans are typically used for

• Fix and flip projects – Buying a property that needs renovations, fixing it up, and reselling for a profit
• Bridge loans – Short-term financing needed to close on a property before selling another one or while waiting on longer-term financing
• Purchase and rehab – Buying a property that needs upgrades to increase value
• New construction – Building a home
• Cash-out refinancing – Pulling equity out of a property for other investments

Unlike traditional mortgages, personal hard money loans are not based on your income credit score or financial history. The focus is on the real estate asset itself and its potential value. This makes these loans ideal for investors who may not qualify for bank financing.

How Do Personal Hard Money Loans Work?

The basic process of getting a personal hard money loan is:

• Find a lender – There are many private lenders and hard money companies to choose from. Do your research to find one that fits your needs.

• Submit a loan application – The lender will want information on you, your experience, the property, and your project.

• The lender evaluates the deal – They will assess the property value, rehab budget, and exit strategy to determine risk.

• If approved, docs are drawn up – This includes the loan agreement stating terms like interest rate, fees, and repayment requirements.

• An appraisal is ordered – This helps determine property value and how much the lender will lend. Expect to pay $400-$500.

• Close on the loan – You’ll sign final paperwork and receive the loan funds.

• Make repairs and sell/refinance – Use the money to renovate the property and execute your business plan.

• Pay back the loan – Repay the lender according to the loan terms when the project is complete.

Hard money loans typically have an interest rate of 10-15%, loan-to-value ratios of 60-80%, and terms of 6 months to 3 years. Borrowers can expect to pay 2-5 points in origination fees.

Benefits of Personal Hard Money Loans

Here are some of the biggest pros of using personal hard money loans:

• Fast funding – You can receive funding in as little as a few days since there is less red tape than traditional bank loans. Speed is critical for real estate investors.

• Flexible qualification – These loans are based on the deal/asset rather than your finances, allowing more investors to obtain funding.

• Higher loan amounts – Hard money lenders are often willing to lend higher percentages of a property’s value compared to banks.

• Less restrictive – Hard money is more lenient on things like low credit scores, unconventional properties, or short-term projects.

• Relationship-focused -Private lenders develop close working relationships with their borrowers. This can really pay off over time.

Drawbacks of Hard Money Loans

Of course, these loans aren’t perfect. Here are some potential downsides to consider:

• Higher interest rates – Rates typically start around 10% and can go up to 15-17% depending on the lender and deal.

• Shorter terms – Hard money loans usually have repayment terms of 6 months to 3 years. This requires timely selling or refinancing.

• Upfront fees – Origination fees of 2-5 points are common. There may also be appraisal or other fees.

• Prepayment penalties – Some hard money loans charge a penalty if you pay off the loan early.

• Limited funds – A given lender may only lend up to a few million dollars. For larger projects, you may need multiple loans.

As you can see, there are many pros and cons to weigh when considering a personal hard money loan. The higher costs must be balanced with the benefit of flexible qualifications and quick closings. These downsides can often be mitigated by choosing the right lender, negotiating terms, and making smart real estate deals.

Tips for Getting the Best Personal Hard Money Loan

Through my experience getting private financing, I’ve learned several tips that can help ensure you get the best possible hard money loan:

• Have a solid business plan – Lenders want to see that you know what you’re doing and have planned out the project and exit strategy.

• Get multiple quotes – Check rates and terms from several potential lenders to find the best deal. Leverage competitors against each other.

• Focus on the relationship – Finding a lender you work well with and can count on is very valuable in the long run.

• Know your numbers – Run the calculations so you can support your rehab budget, timeline, valuation, costs, and profit.

• Have skin in the game – Put at least 5-10% down to show you’re invested in the success of the project, not just the lender’s money.

• Don’t take the max – Taking the maximum loan amount offered leaves you no margin for error. Build in a buffer.

• Plan your exit – Hard money loans need to be paid back quickly. Know exactly how you will pay off the loan.

Following these tips can help you secure favorable loan terms, establish a relationship with a lender, and set up your project for success.

My Hard Money Loan Experiences

I’ve used personal loans from private lenders on several real estate projects, so I can speak from firsthand experience. Here are a couple examples:

Fix and Flip Deal – For a recent flip project, I used a 12-month hard money loan for 75% of the purchase price plus 100% of rehab costs. By establishing credibility with the lender through previous deals, I was able to get an interest rate of just 11% and 3 points in fees. This gave me the financing power I needed to buy, remodel, and quickly resell the property for a six-figure profit.

Bridge Loan – When I came across an off-market commercial property deal, I needed to move fast to lock it in. I used a 6-month bridge loan from a private lender I found through colleagues. The lender provided 80% of the purchase price at 13% interest and 4 points in fees. This allowed me time to arrange longer term financing at a much lower cost of capital. The bridge loan saved me from missing out on a highly profitable acquisition.

Rehab and Refinance – On another residential deal, my plan was to tap into the property’s equity through a cash-out refinance after improving it. I worked with a hard money lender to secure 80% of the purchase price plus all renovation costs at 12% interest and 3 points. After fixing up and seasoning the property for 6 months, I was able to refinance into a conventional mortgage at 4.5% interest and pull substantial cash out tax-free.

As you can see from these examples, hard money lending has been invaluable to my investment strategy at times. The key is knowing when to use it versus other financing options.

Should You Use Personal Hard Money Loans?

Hard money isn’t right for every real estate investor or project. As an experienced rehabber and flipper, here is my advice on when personal hard money loans make sense:

• When you need to close quickly on a property and don’t have time to arrange traditional financing

• For fixer upper properties that don’t qualify for standard loans until repairs are made

• If you will add enough value through renovations to justify the higher cost

• When you need a bridge between buying and longer term financing

• If you have a solid exit strategy like selling or refinancing within 6-24 months

• When you need rehab financing your primary lender won’t provide

• If you have an urgent capital need but less-than-perfect credit or income

• As a real estate pro with a project and experience but lack the big bank credit history

Conversely, here are some cases when you may want to steer clear of personal hard money loans:

• If you are purchasing a property as a long-term hold rather than a quick flip

• For properties with little rehab potential or forced appreciation

• On low margin deals where interest costs will eat up your profit

• If you have access to cheaper conventional financing

• When you don’t have a clear plan or timeline to repay the loan

• If you are a first-time investor without much experience

• As a homeowner looking to tap equity with a cash-out refinance

Carefully evaluating your specific situation