Hard money, fast money: When a good investment won’t wait

Financing for flippers

Sometimes a good investment won’t wait. You have the chance to buy an ugly but sound house, make some easy improvements and flip it fast for a 25 percent gain. Those opportunities don’t come around every day. But you’re competing with cash buyers! How do experienced investors buy fast without paying all-cash? With “hard money.”

What is hard money?

So-called “hard money” comes from private lenders, people or groups of people who put their money up for short-term borrowing. Many believe that these loans are just for non-prime borrowers, people who can’t get approved for financing from cheaper, mainstream sources. But that’s not true.

The biggest users of this kind of financing are property investors. They might have a line of credit to purchase homes at auction. Or pay cash first, then refinance to get their money back to rehabilitate the property or buy more flips.

How fast can a hard money loan fund?

Hard money loans typically take a couple of weeks but can fund in as few as three-to-five days. The buyer’s credit history is typically immaterial, and income may not be verified either.

While mortgage lenders under government oversight cannot lend without verifying income, private lenders don’t have to comply with the same consumer protection laws. So you have to exercise more caution. But less verification does save time.

Why hard money?

Hard money is not for everyone (or even most people). But it can allow you to purchase property that banks are not funding. Fix and flip or rehab transactions, construction, and land and commercial properties may require alternative financing.

In addition, not everyone can comply with traditional mortgage lender credit underwriting guidelines or prove their income in a standard way.

How much does a fast private loan cost?

Private lenders don’t usually do long-term financing. And they often operate on the assumption that the borrower will default, and make sure that they are protected no matter what.

This means they lend against a smaller portion of the property value (50 to 75 percent) and charge fairly steep fees upfront — for a $300,000 loan, the lender charges might come to $15,000. And expect to pay a higher interest rate as well. Depending on your credit, that can be 3-to-10 percent higher than for standard prime loans.

The only reason to take out this kind of loan is for a great investment that requires a speedy response. If it costs you 10 percent of the loan amount for interest and loan fees, but you can make 25 percent on the deal in weeks or months, paying more for fast financing is probably worth it.

Alternatives to hard money

If you have decent credit and own a home, it may be able to provide the funds quickly for your investment property.

• Take a second mortgage against your primary residence and bank the cash until you need it for a fast property purchase
• Obtain a home equity line of credit (HELOC) and write a check when an investment opportunity presents itself
• A cash-out refinance may be the best when you have a lot of home equity and need a large amount of cash

Hard money is pretty much the last resort, or it should be. If your finances are so shaky that the only way to buy a home is with hard money, you’d likely be better off using your funds to improve your credit rating, pay off debts and increase savings.