Playbook #067: Hard Money Lending

🖼️ The Big Picture

If you have experience with real estate investing, you’re sitting on cash, and you like aggressive returns backed by hard assets, then hard money lending could be a gamechanger for you.

Also known as “asset-backed,” hard money lenders underwrite based on the value of the property itself, and don’t take into account “soft” features like the investors credit score and balance sheet.

They typically have a short time-fuse of up to 2 years, so fix-and-flip investors often use them to get a loan on up to 75% of the property’s ARV (after repair value). Other investors negotiate 30% discounts on multifamily and commercial buildings and use these loans so they can buy without using any of their own money (they then optimize the building and refinance it before their time-fuse runs out).

Because these are often projects that involve a higher (or simply different type of) risk than a traditional bank will lend on, hard money lenders charge high interest rates of 10 - 15% plus points of 2% - 4% of the total amount loaned.

This is kind of an intense win-win relationship, sometimes with high stakes and high risks.

Investors pay a premium to access funds they may not have gotten otherwise, and get them much faster than banks (closing in days or weeks instead of months)… which can be critical since time kills deals.

Lenders need experience to be able to properly underwrite deals: to assess risk and collateral, determine LTV, and negotiate terms to protect themselves in case of default. If a borrower defaults on the loans and hands over the keys to a half-repaired property, will you know what to do with it?

If so, you can really put your money to work as a hard money lender.

🔢 By The Numbers

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