How to Get a Commercial Hard Money Loan

You’re about to discover how to get a commercial hard money loan and finance commercial real estate opportunities that normal banks will not lend on. In this detailed training, you’ll learn the basics of commercial hard money loans, an example of a deal funded with commercial hard money, the major differences between commercial hard money financing and traditional commercial bank financing, answers to the 3 most common questions people ask on the subject, how to steer clear of fraudulent commercial hard money lenders and the best resource for finding commercial hard money lending options. Here’s how to get a commercial hard money loan:

 

What is a Commercial Hard Money Loan?

A commercial hard money loan is an asset-based loan secured by the property’s equity whereby a conventional lender would not lend on the property for a specific reason. It’s called “Hard Money” because it is backed by a “hard” asset, which is real property.
A commercial hard money loan is also known as a bridge loan because it bridges you from a temporary situation to a more permanent situation. The goal is to be bridged from a commercial hard money situation to a more conventional situation where you’re going to go from a very expensive interest rate payment per month to something much lower.

 

Commercial Hard Money Loan Example

There is an 8 unit apartment building for sale for $400,000. It is distressed and four units are vacant, making the occupancy rate 50%. The property needs many repairs such as the roof, siding, and loose handrails, which will cost around $25,000. The apartment also has city housing fines of $15,000 and delinquent property taxes of $10,000. That’s approximately $50,000 worth of issues that will need to be taken care of. A similar 8 unit apartment across the street, that was not in distress just sold for $650,000. Therefore, if you bought the property for $400,000 and fixed it up with $50,000, you could still create $200,000 in equity.

A traditional lender would not like this deal because the apartment is not producing enough income with that 50% vacancy. A hard money lender might say yes to this deal but they would not lend as much as a conventional lender. The hard money lender would lend you around 60% of the project cost, which includes the acquisition cost ($400,000) and any rehab/fines ($50,000). So, they would lend you 60% of the $450,000 which is $270,000. This means that you would be required to put down a deposit of 40% or $180,000. You don’t need to have a good credit, you just need to have $180,000 for the down payment because the loan is secured by the hard asset.

Let’s say that you come up with the $180,000. The goal after you close the deal is to take care of all the repairs, pay the taxes and fines, and re-rent the property at a 100% occupancy rate. Once the property has been stable for a period of time it is ready for a more permanent financing scenario.

Most commercial hard money lender’s interest rates are 12%, 14%, or even 16%. This is very expensive so the goal is to fix up your property, get out of your hard money loan, and qualify for a more traditional conventional loan. After the repairs and stabilization of your property you will be able to get a loan from a conventional lender.

Commercial Hard Money Loan Refinance

I want to go over to an example of an exit strategy so I can show you how this is a good deal. After you have fixed up your property and are in good shape you can bring the apartment to the lender and show them that it is now worth $650,000. The traditional lender will then offer to lend you around 75% of the value of the property, which is $487,500. Once you have your new conventional loan, you can use this money at closing to pay off your hard money loan.

• Property Worth: $650,000
• Conventional Loan Amount: 75% of Property Worth so $487,500
• Hard Money Loan Amount: $270,000

If you pay off your hard money loan with money from your new conventional loan you are left with $217,500. This is known as a cash-out refi. I have a video on YouTube called, “The Secrets to Refinancing Commercial Real Estate”, that you can check out to learn more.

When the bank hands you a check for the remaining $217,500, you can use this money to pay yourself back the $180,000 deposit you put down on the original hard money loan.

You can also keep this process going by using the money to obtain another hard money loan on another property.

Or if you had investors help pay the original deposit, you can use this money to pay them back, and still have enough left to pay yourself an ownership interest.

What’s Your ROI on this Deal?

If you put none of your own money into this deal then your cash return on investment is actually infinity.

To summarize this, what you did was find an eight-unit property for sale real cheap due to some issues it has. You then obtained a hard money loan which you used to buy and fix up the apartment. After fixing up and stabilizing the property you applied for a permanent loan for 75% of the properties new value. You used this new conventional loan to pay off your hard money loan, which is known as a cash-out refine.

The Five Major Differences Between a Hard Money Lender and a Conventional Lender

Interest Rates

A conventional loan’s interest rates are lower than a hard money loan. In fact, hard money loan interest rates can be up to three times higher than a convention loan.

Upfront Costs

In a conventional loan, your upfront costs can be as low as 1% of the loan amount. On the other hand, a hard money loan will charge 2-5% just to use their money.

Loan Terms

A conventional loan term can be as little as five years or all the way up to 30 years. A hard money loan term is typically between 6-12 months.

Borrower’s Credit

Your credit is very important to a traditional lender. Hard money lenders check for major flaws, but because the loan is based on the equity of the property, you can hustle flaws in your credit and still qualify for a hard money loan.

Closing Time

Closing time is the amount of time it takes to close a deal. A conventional loan is more time consuming because they have to underwrite the deal, order inspections, go through their legal department, get a “yes” from their loan committee, and put together their closing paperwork. This can take 30-60 days.
Commercial hard money loans can close in as little as 7 days because the hard money company is usually owned by one or two rich individuals who are lending out their own money.

 

3 Most Common Commercial Hard Money Loan Questions

1. Does My Credit Matter?

The answer is maybe. When a hard money lender goes through the process of qualifying the deal and you, they look at the deal in three ways. They look at the property, they look at the area and then they look at you, so you’re third on the totem pole. However when looking at you, if you have bankruptcies or foreclosures, you have some explaining to do. If there is not a good explanation why you have these two things, your loan will be denied.

2. Do I Need to Put Money Down?

The answer is yes because there is no 100% financing for hard money loans. You will have to put between 20-40% down depending on your commercial hard money deal. This is the down payment plus the closing cost, which can be up to 5% or 6% of the loan.

The great thing about hard money lenders is that they are open to creative deals. I recently had a student purchase a 90-unit apartment for 3 million dollars with 10% down. The hard money lender required a 30% down payment so the student negotiated with the seller to carry the other 20% for three years as a second mortgage. The hard money lender was open to this deal because, their 30% down requirement was satisfied.

3. What’s the Secret to Getting My Loan Approved?

You need to have a realistic exit strategy that everyone involved in the deal agrees with. Everyone involved would be yourself, your lender, the person you’re borrowing your money from, your property manager, and your mentor. Having everyone agree on an exit strategy will put you in the best position to get your loan approved.

 

How to Identify Fraudulent Commercial Hard Money Lenders

Here are 4 red flags to watch for when interviewing commercial hard money lenders:

1. Do not pay hard money lenders any upfront fees until they have looked at your deal, visited the property, and reviewed your capacity to make sure it is realistic. If you come across a company that says, “Hey, send me $750 for me to look at your deal” before they do anything, that’s a red flag, don’t do that.
2. Do not use a hard money lender that is unwilling to divulge their source of money or provide references. This is a sign that they have no money.
3. If the terms are too good to be true they usually are. If a hard money lender offers you 100% financing, and promises to close within five days with low upfront cost, and low interest rates, it is mostly likely too good to be true.
4. 100% financing. Anytime a hard money lender offers 80% loan to value or higher on a commercial loan it is a red flag.
   These are the four red flags. If you see any of these warning signs I want you run and use someone more reputable with more realistic terms.

 

Hard Money Locator

Hard Money Locator is a resource for finding commercial hard money lenders all across the country. This is a great tool that enables you to search for a hard money lender based on the criteria of your deal.