by Tod Snodgrass
The one thing that most real estate investors (REIers) never seem to have enough of is capital. That is because whether you are a wholesale contract flipper, rehabber (fix/flip), builder/developer, or you wish to acquire properties to buy and hold, the one common denominator that cuts through all of those REI methodologies is the need for investment money from time to time.
Of course, there are many, many sources of outside capital available: Conventional financing (from your bank), private lenders, hard money people, etc. However, identifying the most cost-effective financing that meets YOUR particular needs (and which may change over time), THAT is the critical challenge faced by most REIers.
Basically, you have two choices: Use your own capital (cash, credit) or OPM (Other People’s Money). One good money source of OPM are Hard Money Lenders (HMLers). For a long list of them, see biggerpockets.com/hardmoneylenders.
Most HMLers usually want deals that are 12-24 months in duration, and for more than $100,000 (though there are some who will lend less than six figures). They also want you to have some “skin in the game”. That is, they require that you bring say 20%-30% of the total costs of the deal to the table (your own money/credit, private debt/equity, etc.). Further, they often require a reserve account of some sort to cover payments for expenses that may be required down the road. Sometimes these restrictions prevent HML-financed deals from getting off the ground in the first place.
HM Loans are basically a form of asset-based financing in which the borrower receives capital secured by real property. HMLs require monthly payments that often includes a balloon payment at the end of the term. How much a HML lends is primarily a function of the value of the property that the HML is financing. The amount a HML will finance is determined by the ratio of the loan amount divided by the value of property. This is known as the loan to value (LTV). Some HLMers will lend based on the after-repair value (ARV) which is the estimated value of the property after the borrower has improved the property.
However, suppose you only need the money for say, 1-3months? And/or you need less than six figures?
Until the last few years, that type of capital was not readily available. But now it is. It is called short term first position funding. For example, suppose you are a REIer who needs:
- Money for 90 days or less
- Under $100,000
- Capital quickly (8-10 working days)
- Asset-based funding with: no credit checks, no appraisal.
If the above describes a current scenario you have in front of you, now there is unique funding choice that has come to the fore, in the past couple of years, that answers this very specific need. To be clear, short term first position funding is expensive capital that is geared towards credit-challenged investors, or those who need funds for a fast flip with a profitable exit strategy already in place. Also, the LTV must be 40% or less.
True, the need for this type of unique funding does not arise every day. However, for a REIer who needs a modest amount of money, for a limited period of time, it can be a struggle to access the money when they need it. For example, suppose a REIer needs say, $45,000 for 60 days. Virtually no HMLers will touch such a deal. And because the funding requestor may have bad credit or is doing a flip, conventional funders are usually not eager to help either. Yes, there are some private lenders who can assist, but they are often hard to find.
In closing, HMLers are best utilized by seasoned professional REIers who need 1-2 year financing, in higher amounts (six figures and above), and who can bring a good chunk of capital to the table for carrying costs during the term of the HML. Obviously not everyone who would like to use a HML will qualify. They are not for everyone. And when HMLers are not able to meet the REIers needs, there is now an alternative: short term first position funding.
What We Do: Quickly provide first position gap funding, in smaller amounts, to investors who own a property free/clear (or wish to acquire a property with a low purchase cost), but cannot or will not use hard money lenders or conventional funding sources.
Contact info: Tod Snodgrass, email@example.com, 310-408-7015