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There are two sides to every coin. Hard money lending has its share of positives and negatives which we will explore. But first, let's define hard money lending (also known as asset-based lending). DEFINITION AND MARKET VALUE We understand why hard-money lenders charge what they charge. With little more than a dilapidated property as security (*this is the "asset" in "asset-based" lending) and your promise and incentive to repair it, they lend you money in as little as a week. No bank will do that, unless you have the cash on hand to do it anyway. Also, we spend an incredible amount of time thinking about appropriate leverage for long-term passive income. Too much leverage in a portfolio can destroy wealth. Hard Money without a personal guarantee is what is called "off balance sheet (OBS)" debt. You can create the benefits of leverage without the risks. (You pay for that difference.) Not only creating an incredibly powerful financial sturcture, the service is an absolutely necessary one - nobody else will lend the money on most rehabs. The only competition to hard money lenders comes from other hard money lenders. But why are the interest rates so high? Typical hard money loans have interest rates of 12-18%. Rates are so high because buyers will pay it. Buyers need to pay it. Because buyers might lose a deal without them. Because a part of something is better than a whole lot of nothing. Because OBS leverage is not and should not be free. Local banks are not interested in the business, particularly the "no guarantee" part. Banks will need some training in what investors doso as to relieve them of the fear of dredging up lending practices that hurt lenders in the 1980's. NEGATIVES HoustonRealNews looks to a rephrasing of Emma Lazarus' Statue of Liberty poem by a hard-money lender holding dollar bills high above an investor's head as a substitute for doing any real analysis on the cons: Give me your poor, your tired, your deal-finding masses, my 16% interest rates and my 6% points, your $600 worth of inspection and appraisal fees upfront, your ability to carry the first round of repairs out of your own pocketbook, first lien on your MAO deal, your labor in managing the project, your inspection fees to get draws, your house and labor if you do not find a buyer or refi my loan at its expiration; yearning to make money in realty. But because I have hard money, you bow down to me in fealty.If you believe MAO deals to be great, then you are likely to feel that Hard Money lending rates and practices are outrageously high in many instances. The common boast of hard money lenders is that it is better to pay high interest than to partner with someone 50/50. The problem with hard-money lending is that you don't have a partner with whom to share risk. They get theirs, then you get whatever is left. Sometimes its 70/30 in your favor, sometimes it is 100/0 in theirs. Your protection is ONLY if you do not have to make a personal guarantee on the money. This protects you if the deal goes bad and leaves the lender and their interest and points to fix it. Various attempts have been tried to pool money and lend within investment circles. And certain groups perform that function amazingly well. BIG BUSINESS In our corporate history, we saw that the operating companies earned decent money. The companies who lent money to those operating companies earned big money. If you want evidence that hard-money lending is a big business, look no further than a local association. At a Realty Investment Club of Houston (RICH), you will see oodles of Hard Money Lenders advertising their money. This business is big business in Real Estate investing. If you have questions and would like more dedicated and one-on-one/small group education, we can set up live in-person or on-the-job learning sessions - upon request or at a regularly scheduled time. Related Articles -BASIC EDUCATION OVERVIEW - Basic Investing ARV - After Repair Value Birddogging Contract for Deed Dealing with Contractors Estimating Profits Evictions - A Primer Executory Contract Foreclosure Overview Foreclosure Types Overview Hard Money Loans - a/k/a Asset Based Lending* Lease Options Leverage MAO - Maximum Allowable Offer Multi-Family Investing Basics as Presented by David Lindahl on March 4, 2006 No-Money Down Real Estate Investing Options Part-Time v Full-time Passive Investing For Beginners Pre-Foreclosure Profit Calculation Remodeling for Beginners Rent vs Buy Is Really Rent vs Sell Seller Financing as Investor Buying Tool Skiptracing Subject To Wholesaling Return to Listing Return to Investor Education |
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