I have a good friend who has flipped a lot of homes….
Like around 200 flips.
Now I have heard of the hard money loan concept and have a general idea but I wanted to learn more about them.
He was always talking about points, interest rates, fees, and other jargon I didn’t fully get.
Finally I asked him to sit down with me and help walk me through it.
Today I want to go over the things he told me and why they are important to fund managers.
Hard Money Loan Basics
Generally people think of hard money loans as expensive,
And they are…
But they can also be used to make a lot of money.
Typically hard money loans are used for real estate.
House flippers, renovating rentals, etc.
But why would you need a hard money loan?
Let’s say you find this nice investment property at auction that you want to purchase and it costs $300K.
But the problem is that you don’t have $300K cash,
And you better believe that a bank is not going to give you a loan at 100%!
This is where Hard Money Lenders come in.
These lenders can close fairly quickly (within 5-10 days and sometimes even 3 days),
Which allows you to be able to get good deals on the spot without going to get approval.
But why is it called “hard money”?
That’s because just like everything else in life there is give and take.
You will be able to close fast but these lenders are typically much more expensive than a bank loan.
These lenders will also have whats called “first position“ on that home.
This means that if you can’t repay then they have the right to take they from you,
Just like if a bank were to foreclose on you.
Not only do they get the first position but they are also going to charge you a higher rate than a bank.
At the time of writing a bank would probably give you a 3% interest rate on a 30-yr mortgage.
Well hard money lenders are goin to charge you more in the ballpark of 8%(give or take a few percentage points).
This is because the loans are for a much shorter time,
Typically a year.
One way these loans are different however is that it is interest only with a balloon payment.
This means that you will only pay interest every month, or whatever terms you agree on, and at the end of the loan’s life you owe back the original principle.
In this case $300K plus the last interest payment.
Does this all make sense?
One of the ways that funds use this money is just like how my friend does it, by flipping real estate.
Except that you don’t have to pay an interest rate if you don’t want to.
You can raise money from you Limited Partners and then purchase, flip and return that money back and forth from the fund with no fees.
You then would take those profits and use that to pay your investors in the form of a sort of dividend.
This is why establishing a fund is so much more lucrative that excepting hard money off of the street.
It is the same principle except that you don’t have to pay as many fees, points, and interest.
Another benefit is that no one has a “first position” on your flip.
Well technically the Limited Partnership does but it is at the discretion of the General Partner,
Or you as the fund manager.
Funds are an amazing way to give yourself an advantage and not being subject to someone else’s fees, points, and decisions. They put you in control.
If you want some more details on how points and fees work check out the YouTube Video posted at the top of this article.
I just love how funds can change the game in your favor.
Not only in Real Estate but it any asset class that you want to invest in.
What are some other ways you think funds can give you the advantage to hard money?
I would love to hear about them so join our free facebook group below!
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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.