First, let me be clear: hard money is not a bad thing.
If you can do a deal that makes you a five-figure check, do it. If you have to pay someone 18% or 24% interest on the money that closes the deal, do it. You’re getting your check, let them get theirs, too.
That being said, hard money is NOT the way to build a long-term real estate investing business.
I want to talk to you today about three ways to avoid hard money and its expenses and deadlines. You’ll also discover a little-used way to actually leverage knowledge of hard money to actually put more money in your pocket, better food on the table, and greater peace in your mind.
First, a quick review of hard money. I really don’t know why it’s called “hard” money, but this is what it is: money lent – often by an individual – to a real estate investor for a high interest rate and a short period of time, secured by real estate. Interest rate is typically in the 18% to 24% range. Term is anywhere from a few days to several months. The loan is usually secured by a first position trust deed or mortgage on the property you want to acquire. Wikipedia goes into a more extensive definition of hard money here.
The upside of hard money is that it can often be acquired very quickly – sometimes as little as a few hours. Also, it does not depend on your own credit. This means if you find a deal and are strapped for cash or just don’t want to spend your own money, you can still get the deal done.
But there are other, better ways to finance a real estate transaction.
Three Ways to Do Deals without Hard Money
- Private investors
- Credit partners
Today we’re going to talk about the first three.
Private investors are often people with more money than time, who like the strong returns and secured loans available with solid real estate investments. Although some hold the money in cash, more often they will have their funds in retirement vehicles or stock portfolios.
Because they’re not active and experienced investors as most hard money lenders are, they’re willing to take a significantly lower interest rate, usually between 10% and 15%, with the most common being 12%. Because their money is often tied up and takes time to be available, they don’t typically have the same speed of availability as hard money.
A partner takes an active part in the deal, whether that be money, effort or both. They take a share in the risk and the benefit. Meaning that if the deal goes down, their money or effort goes down with it. But if the deal does what it should or better, they get a percentage up to the very last penny.
The downside is that a partner can take the largest share of all, up to 50%, or more if they’re the lead. The upside is that they may bring skills, resources, or experience that make the deal possible. And it’s always better to have a smaller five-figure check than none at all. 😉
Like a “regular” partner, a credit partner is ann active participant in the deal and provides funding. However, unlike the partner mentioned above, a credit partner is not briging her own cash to the transaction, but is instead bringing her excellent credit, which then allows the project to get regular bank financing.
The upsides are the same as with a partner bringing cash; you get the deal done. The additional downside of using a credit partner is that your project will now need to meet more stringent and less flexible bank requirements in order to get funded.
I know I said we’d talk about three, but you really can’t miss out on the most exciting funding option of all – seller financing. In this case the person or persons selling you the property offer to let you pay off the balance of the purchase over time. They basically loan you the money to buy their property.
Why is this exciting?
Two words: flexibility and motivation. Let’s clarify this by looking at the mainstream option – the bank.
If you deposit money into a bank, their goal is to pay you the least money (“interest”) possible, take your money (“deposit”) and make as much as they can with it. If you borrow money from a bank, you’re on the end where they want to make the most money possible, meaning they want to charge you the highest interest they can. And as bankers tend to be highly risk-averse, rigid, and emotionally detached from the success of your deal, they are not going to go out of their way to help you make the deal work.
Your seller is the exact opposite. They’re often far more interested in what the future has to hold for them than they are in making every last dollar from the deal. They’re used to eking out 0% to 2% interest on their deposits in the bank, so getting paid 3% to 6% by you is an absolute windfall. And they are motivated to get out of that property and on to the next chapter in their life, so they will typically be far more accepting of flexible terms. It’s good for your seller, it’s good for you. Win/win.
Why to Always Plan to Purchase with Hard Money
This is where you prepare for the downside, and it can mean not just security, but even increased profits. You can see why and how I do this in my free video. You can get access to here, to the left of this post on the top of this page or by visiting How to Invest in Real Estate Portland.
The bottom line is that if you always think and plan like you’re using hard money, but find the very best funding option you can, you will always give yourself the very best chance of making a five-figure paycheck, taking care of your family, and having enough left over to enjoy a quality lifestyle. Now, go take action and prosper.