Hard Money Investor Rehab Loans

"Hard Money Loans. Investor's Best Friend Or Biggest Crutch?"

Hard Money can be a quick way to fund everything from residential property, to industrial facilities to new home construction. I won’t get into every use of hard money but I will give you a general frame work that your imagination can grab a hold of.

For starters most hard money lenders let you finance up to 65% of the value of the house. If it is for rehab purposes, they’ll use the “after-repaired value” of the property as the basis point. I have seen occasions that went as high as 75% but 65% is the norm.

These loans are very situational and very flexible so there is a lot of wiggle room if the deal makes sense. It could be a strike against if you are new to the game but fortunately that can usually be offset with adequate reserves and a good plan of action.

Let’s look at an investor rehab loan to see how the numbers work.

Let’s say you come across a beat up old home in a decent neighborhood where homes sell for $100,000. The seller takes you through the home and you determine that it needs around $12,000 in work. You’ve gotten prequalified for the rehab loan and want to know what the maximum you should pay for the property.

To keep it basic, you want to take $100k x 65% - loan costs – repair costs/holding costs = Purchase price. Loan costs, for hard money loans, run from 8-13% of the total loan amount. They are not cheap but it’s less money than you’ll pay to a partner! For now we’ll assume costs of 10% and holding costs of $2,000. Given those numbers, you probably shouldn’t pay more than $45,000 for the property. If you pay more, that just means more money out of your pocket to get the deal done.

Here are a few quick tips you can use to maximize the likelihood of being approved for hard money, in general:

1. The more equity in the property after the loan, the better,
2. The higher your credit score, the better
3. The more credit history you have, the better!
4. The more liquid assets you can show that you have personally or have guaranteed access to (lines of credit, partners, rich relatives. . .) the better,
5. The more populated the area, the better,
6. The faster the properties in the area sell, the better
7. The more solid the appraisal value, the better! A lot of hard money lenders like to use fire sale values as the basis point of the loan so don’t be surprised. This is definitely not the time to use stretched values.

All in all, this is a numbers game. Don’t get attached to a property if the numbers don’t make sense. Hard money lenders can be flexible but bring them a deal where the numbers don’t add up and it could cost you a relationship. Credit doesn’t always matter but it does help, tremendously, if you can show good credit history.