Before I dive into this week’s question, I want to take a moment to encourage you to thoroughly read this blog. We have over three years worth of posts that have already answered most of the questions coming in to the surveys multiple times over.
That’s why it’s actually become painfully difficult for me to find new questions to answer for you…
But I got one just yesterday that hasn’t really been addressed before and I think it will help a lot of you out there.
Here it is:
“How do I access hard loans at reasonable rates?”
To answer this question, we have to get clear on what is “reasonable”. Most people that I talk to are evaluating interest rates from the standpoint of what they can get on a conventional home through a traditional mortgage.
At the time of this post, mortgage rates are still at all time lows – hovering around 3% on a 30 year fixed.
Now if you are considering that benchmark as what is reasonable, you might as well forget ever closing on a hard money loan.
Hard loans are completely and utterly different than conventional loans, so you are only going to be disappointed if you are expecting those kinds of rates with hard money.
Why are they different?
First off, most hard money lenders do not make a lending decision based on your credit. You can have terrible credit (aside from things like current foreclosures, judgements and bankruptcy) and still get a loan.
You will never, NEVER get a 3% 30 year fixed unless you have a 720+ credit score, among other underwriting factors in your favor.
Second, hard loans are short term loans. Here at DoHardMoney.com, our typical loan term is 5 months. Yes, we charge a higher interest rate than a traditional mortgage, but it’s only compounded out over a VERY short term.
So while the interest rate on the surface appears high, you don’t pay all that much in interest when you satisfy the loan. Particularly when you stack it up against a 30 year fixed conventional loan.
If you look at the amortization table on that mortgage, you ‘ll be spending tens of thousands to hundreds of thousands of dollars in interest over the life of the loan, depending on how much you borrow.
Third, good luck getting a bank to lend to you on a fix and flip deal or any other investment deal right now anyway. The vast majority of banks don’t want to take that kind of loan onto the books right now, even if you are “A paper”.
Assuming that you’re comparing interest rates on hard loans to those of current conventional loans, you absolutely must adjust your mindset.
It’s going to be real tough finding hard money for single digit interest rates. If you can’t stomach that and you don’t have strategies in place to make your profits desired while paying those kinds of loan interest rates, then this game is probably not for you.
But if you feel that it still is, all you have to do is find deals that the numbers work on… and believe me there’s plenty of them out there!
Now if I’ve completely missed the boat in my assessment of your mindset and you are NOT comparing the interest rate on hard loans to conventional loans…
Then here’s something else you need to under stand about the vast majority of hard money lenders.
Typically, they will have lower interest rates available to experienced investors and they don’t publish them on their website either!
Real estate investing is all about minimizing risk. When you first come to a hard lender looking for a loan, you pose a significant risk. Particularly if you have bad credit and no money of your own into a deal.
The hard money lender needs to build trust in you before they can offer you better terms on your loans. The only way to build that trust and minimize the risk is to charge a higher interest rate and then offer lower rates once you have a few deals under your belt with that lender.
My advice to you in this situation is to establish that relationship with a lender that you can trust. Do some deals and then ask for more favorable terms. You probably won’t even need to ask, they will happily give them to you when you are consistently bringing good deals to fund and paying off your loans.
Just to quickly summarize what we talked about, you need to have the right expectations of what is a “reasonable” interest rate on hard loans. Then you also need to get some experience by doing a few deals with a lender before you’ll get better terms.
While you are here, one of the biggest reasons that people visit my site is that we offer 100% financing on fix and flip deals. This is regardless of credit, job history or current income.
However, before you get too excited about the prospect of doing deals with no money of your own, there’s something vitally important about this kind of financing arrangement.
Learn more on our next webinar.
COMMENTS