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How Hard Money Loans Work! Easy Guide To Hard Money Loans For New Investors!



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hey guys sean here with everything rei

and today we're gonna talk about

everything to do with hard money loans

coming right up so what are hard money

loans a hard way loan is a short-term

loan that many flippers use to be able

to get in and out of projects while

leveraging the most they can on a

particular project most hardware loans

are for only three to four months they

have very high interest rates compared

to a traditional thirty-year amortized

mortgage but they're used because they

allow you to leverage and they like to

purchase properties that normally you

could not afford for example most

properties in the area go for at least a

million dollars and most people just

don't have a million dollars in cash and

their to go through a traditional route

of getting or long-term mortgage it

would take over a month to close escrow

most days deal is only possible because

the sellers are in some kind of

financial distress and the buyer is able

to close quickly on these deals being

able to use a hard money loan allows you

to purchase a property and close within

ten to 15 days whereas a traditional

loan can sometimes take over 30 days so

what I want to do today it's kind of

break down what a hard money loan is and

what are the common terms that they use

so if you're a brand new investor and

it's your first time getting a hard

money loan then this video is right for

you typically if you're brand new then

you probably can't get as much leverage

as a experienced investor can so you're

looking at getting things at 85% LTV or

90% no TV at the best and what does that

mean maybe that your loan to value ratio

it's either 85% or 90% so if you have a

million dollar property then the max

that someone will loan you is either 850

thousand four eighty five percent

LTV or nine hundred thousand if it's 90

percent LTV now what does it cost to get

a hard money loan well for a brand new

investor you're typically going to see

rates at ten percent annualised and two

points for the origination now what does

that mean that means for your $90,000

loan ten percent of that nine hundred

thousand is due every year and an

annualized rate so after holding that

loan for a whole year you have paid

ninety thousand dollars in interest

payments and yes that sounds crazy but

it's worth it if you're gonna make two

hundred thousand dollars on the back end

what our origination fees origination

fees are the fees that the hard money

lender charges you to originate the loan

and what does that mean originate it

means to create the loan for you they

have people in the back offices

underwriting the loan sales people who

are creating the little packages for you

and working with you to close on time

that all cost money these are hard money

lenders and that's their main bread and

butter for their businesses they get

commissions for every origination that

they produce most of them are 2% for new

investors so for on a $900,000 loan on a

1 million dollar property and 2%

origination fees you're gonna be paying

$18,000 just to close on the loan but

they don't actually charge you $18,000

what they actually do is they just give

you a smaller loan so instead of giving

you that $900,000 loan that you were

expecting they're gonna give you a loan

for eight hundred eighty two thousand

dollars and then don't just say you owe

them nine hundred thousand on the back

end usually what that means that you

have to come up with more money to close

on the property in the first place so

when you come to a closing table what

kind of funds do they need you to have

obviously they want you to have the 10

percent or 50 percent as the down

payment for the property but you also

have to have enough liquid capital to

pay for the origination fees you ought

to have enough money to pay for all

other buyer closing costs like notary

fees tile fees and other miscellaneous

stuff that they charge you when you

close property when you're doing your

hard money alone you also have to be

careful if they have a prepayment

penalty sometimes they'll charge you for

months of payments regardless if you

close in one or two months so some

people they do something called hole

tailing where they buy a property with

hard money and they put it back on the

market without doing anything and they

sell it within one month well if you

have a loan that has four month minimum

that you have to pay those four months

worth of interest payments no matter

what so just be careful when you're

getting a loan to make sure that there's

no prepayment penalty or if there is

that it doesn't affect you because

you're gonna spend a long time working

on that project anyways where you get

your hard money loan you also have the

option of getting a construction loan

construction loan is funds that the hard

way lender will lend to you in order to

do the actual project so for a million

dollar property if you're gonna spend a

hundred thousand dollars into it

obviously you could have the cash and

you could just do the work yourself or

you

asked for a construction loan now

construction loans on hardware loans are

a little bit different because they

don't just give you a hundred thousand a

fee to go play with what they do is they

hold one hundred thousand dollars in

their bank accounts and they give it

back to you as a reimbursement they do

something called draws when you go data

hard money loan you provide a scope of

work you tell them what you're going to

do to the project and how much each line

item will cost and what phase you'll be

doing it in and you can ask for one two

three or four different drawers now

drawers are interesting because you have

to go in there do the work first and

then you get reimbursed for that money

say you have four different drawers each

one $25,000 worth you have to show to

your hardware lender that you completely

that first quarter of your project have

them send an inspector in to look and

make sure that all that work is done and

then they'll pay you $25,000

construction loans you look at crazy too

because some companies they charge your

construction loans on day one even

though you don't actually get that money

on day one what does that mean it means

that when you're getting your loan

you're still going to pay that 10%

annualized rate and two points on that

$100,000 even though you're not getting

that money on day one

that's why personally I don't get

construction loans if I can help it I

think they're kind of a waste of money

and I'd rather just have that liquid

capital so I can do whatever I want

without having to rely on them to fund

my deal because let's say that you have

an inspection done and the inspector

doesn't agree that you did the work well

now you're out of your pocket and you

need a fix to work with money that you

may not have because you're over

leveraged versus if I had the capital in

cash I could just fix it myself and yeah

the worst part again is that they charge

you on day one so let's say you get your

loan on January 1st they're gonna charge

you that 10% interest on your hundred

thousand dollars even though you might

not even get your draws until March or

April which is crazy now there's a

balance between your interest rate and

your origination fee and some people

would say that you know if you're gonna

do a very fast project go for a lender

that will give you a loan at a very high

interest rate but very low origination

fees say that you're gonna complete your

project in one week who cares what the

interest rate is annualize if your

points are like zero but if you're gonna

turn your project on in a week and

you're still paying two points well it

may not be worth it for a lower interest

rate because you're not capitalizing on

that time now when you get a hard money

loan

they're gonna ask for some documents by

yourself for the most part they look at

the property itself obviously they want

to see the address and they want to see

neighboring comps their own underwriting

team will probably do that comes for

them so don't worry too much about that

but you wanna be able to justify why you

think this is a good deal to them so

they'll go and you the money in the

first place they want to see you have a

credit score of about six thirty or

above under that they're gonna start

charging you more interest rate more

points or they may not give you the loan

at all make sure you have some kind of

good credit history to be able to get

these kind of loans they're gonna want

to see again a scope of work they want

to see what kind of work do the property

with the actual numbers attached to it

so it's good to get a contractor to come

take a look at the property and give you

an accurate bid before you actually get

a hard money loan and they also want to

see a sheet of your experience they want

to see if you have clothes on different

properties in the past is this your very

first project don't lie tell them the

truth but if you have more experience

let's say ten projects or more in the

past two years they're gonna give you a

significant discount because they trust

you and they think you're able to do the

project as you said you will they're

also gonna wanna see some big statements

from you probably from the last one or

two months and that just to show your

liquidity liquidity meaning the money

that you can use right away whether it

be stocks bonds mutual funds or straight

up cash they don't want to see the money

you have in real estate because you're

not gonna be able to sell your real

estate and use that as cash right away

so watching liquidity downpayment

construction costs closing costs and six

months of your monthly payments I have

to get all that wrapped up they should

be other clothes in 10 to 15 business

days and they can probably go even

faster

for an emergency by way shod to comment'

to sledding they've been my number one

go-to source for all of my hard money

loans here in the Bay Area so if you

guys have a project that you're looking

into click link in description below ask

for brenda chen and let them know that

shawn pan sent you guys so that was just

a basic primer on everything you need to

know about hard money loans check out

the next video for more detailed

information about real estate investing

hey Carrie