Today we’re talking with a new friend of mine named Ryan Wright who runs the Income Hacker Podcast. Ryan is a real estate investing veteran and has been an active hard money lender and note buyer for many years now.
I was on Ryan’s podcast recently and during our conversation, I learned that he has a lot of experience in the world of hard money lending and underwriting notes. I had a feeling he would have A LOT of insights to offer the REtipster audience because we haven’t covered these topics in great detail on the podcast before.
If you’ve got extra cash laying around and you want to find better ways of putting your capital to work in the real estate world (without doing all the hands-on work yourself), this could be a viable option for you. Likewise, if you’ve ever been in need of financing, my hope is that this conversation will give you a better awareness of what’s available in the world of hard money financing.
Even if you don’t think this is for you right now, there will probably come a day when you’ll wish you knew about this stuff, because this is essentially how you can work smarter and not harder as a real estate investor… so stay tuned!
Links and Resources
- Income Hacker Podcast
- Hard Money 101: Everything You Need to Know About Getting Started With Hard Money Loans
- Fund & Grow
- Fund & Grow Review
- Enneagram Test
The difference between hard money lending & traditional loans
Hard Money Lenders are most concerned with:
What is the value of the hard assets?
Lenders look at tangible hard assets to see if it can be liquidated and what can be recouped after.
Traditional Lenders are most concerned with:
What is this borrowers’ propensity to repay the loan?
Traditional lenders look at soft assets like credit scores and job history to determine viability.
Advantages of using a hard money loan
While securing financing through a hard money lender is generally easier and faster, there are a few points Ryan thinks you should take note of.
When a property is not move-in ready, a traditional financing method usually will not lend for it. If you have a property that is in need of serious repair, hard money is oftentimes the only way to go about getting that property improved to a move-in ready condition.
When you cannot qualify for a traditional loan, a hard money loan is usually a much stronger option. They are not nearly as concerned with your income or debts. The timeframe is much faster. Often, the condition of the property won't justify getting a traditional loan you want a property that's in need of repairs.
From an investor's standpoint, what are the drawbacks?
Typically a hard money loan is for a shorter time period (5-12 months for a fix-and-flip).
There will also be higher interest – because a hard money borrower isn't shopping for the lowest interest rate, they're shopping for someone who will fund their transaction and believe in their project.
Credit Cards vs Hard Money Loans
Lines of credit are often seen as an alternative to a hard money loan.
Combining a hard money loan with credit financing offers a great way to get 100% financing for your project. You can use a combination of the two to ensure incidentals, cost overruns, and even downpayment expenses are covered.
It's difficult to get $100,000 – even with a business line of credit. On average, most borrowers are going to get $15,000 – $20,000 at most. However, if you're able to secure what you need, then you should opt to go that route and take advantage of the first year of 0% interest.
The interest rate of hard money loans will be in the double digits.
Loan to value. What percentage of the house's value is a hard lender willing to lend?
While there are some deductions that a lender may look at, such as crime and location that will determine whether or not they will want to decrease their risks and limit their lending. Most lenders will want to lend around 70% of the post-repair value of the house. Which may mean you'll receive more than the purchase price.
Financing an owner-occupied dwelling with a hard money lender
House hacking and projects like live-in flips are difficult to get funded by hard money lenders for good reason. The increased expense, time, effort, and emotional stressors involved in financing owner-occupied projects make them undesirable for hard money lenders.
Dealing with a homeowner vs a lender comes with a lot of additional regulations. Hard money lenders want to avoid the disclosure, licensing and property claiming issues that come along with lending for an owner-occupied dwelling.
When it comes to taking the property, owner-occupied projects can become even more complicated. It can take 2x – 3x more time and money to get the property back and it can become emotionally taxing.
The best way to go about finding hard money lenders
- Search Online (and take reviews with a grain of salt)
- Local REA clubs
- Private lenders will often come through relationship-based referrals
Ryan's best practices for investing
You have to have rules about where and what you will invest in.
- He doesn't invest in areas with high crime
- The total loan amount needs to be less than 300,000
- Utilize closing protection letters
- Be cautious of fraudulent title companies
How DoHardMoney.com works with investors
They screen and find deals to bring in promising opportunities that they think are good for investors. They’ll be able to view:
- Background reports
- The scope of work – Contractors bids
- And more
They work the facilitation of the process while investors maintain custodianship over their money.
What kind of interest income return would an investor see?
This depends on the type of risk the investor is willing to take and the reward they want.
Investing with experienced borrowers will usually yield around 8-10%.
Taking on a little bit more risk, you can expect between 10-12%.
And if you decide to work with new investors and take on even more risk, you can see from 12-15%.
Biggest issues that arise in hard money deals
Dealing with the unknown when it comes to certain aspects of hard money lending are all a part of the risk for return. These are the ones on the forefront of Rick’s mind:
The underwriting process
Ryan and his team take precautionary measures to ensure, to the best of their ability, that they are working with the right people. Including background checks and credit pulls.
If you don't have a personal relationship with the people you're working with and have assurances that they’ll do the work they claim they’ll do, then you should take a streamlined approach including a draw and inspections to underwriting. This will protect you from future problems that will undoubtedly pop up.
Why aren't there a lot of hard money lenders in the vacant land investing business?
There may be some ignorance regarding the amount of cash flow involved in the land businesses. Private investors are likely the best bet as it is typically looked at as a liability, not an asset. It may be an untapped opportunity.
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Thanks again for joining me this week. Until next time!