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A Hard Money Lender’s Take on Hard Money 101

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(NOTE: What it's like to write a $1,000,000 check for a sweet piece of undervalued real estate … even if your bank account is overdrawn and you owe the local lawn boy $20? This special report shows you step-by-step.)

kaiToday we’d like to share some “hard money” insights from fellow Real Estate Mogul Kai Johnson.

Kai’s been a Texas based real estate investor since 2008 (mostly wholesaling; 60+ transactions and counting), and he also represents a leading hard money lender servicing Texas investors – an alliance that first stemmed from simply helping his investor-buyers get access to more and better investor financing, so they could do more deals, faster and easier.

Personally, I like more, faster and easier.  Don’t you?

So I guess Kai’s on a mission to help his fellow investors better understand how hard money can be leveraged as a powerful fulcrum in your real estate deals. (And with an average of over 2 million dollars in monthly hard money loans, you could say these guys have street cred.)

So let’s dig in, shall we?

What is Investor/Rehab Financing?

Many names are associated with this concept and they all are one in the same. Commonly used terms include: hard money, private money, bridge loan, rehab lending, etc… And in my view, it’s all just semantics.

Here’s how you should see it: This type of financing is simply an ‘investment tool’ to help real estate investors utilize the power of leverage to quickly and easily do more deals.

Successful investors are concerned with two things: OPM (other people’s money) & ROI (return on investment). And because of the importance of OPM & ROI to your real estate business, I believe it’s not actually financially savvy to use your own money to pay all cash for a property.

Let me repeat, the worst thing you can do is pay all cash for a property…

Let me explain…

questionThere are two types of investors when it comes to financing and your level of sophistication and chance of success comes down to one of two questions. Which question does the Mogul real estate investor ask?

Question A:  How much will it cost me?

Question B:  How much will I make?

If you tend to focus on Question A, then please stop reading and go dig into all the ‘Inner Game’ lessons…you are not ready to start using the power of leveraged funds to buy real estate.

If you lean more towards Question B, then congrats, you have the investor mentality and the proper frame of mind you needed to succeed in this game.

In just a minute I will further explain why costs are irrelevant and why ROI is the only thing that matters. First let us review some hard money commonalities.

The Leverage of Hard Money

First and foremost, this type of financing is short-term funding and is meant to help you utilize leverage, minimize risk and potentially have multiple deals working simultaneously versus just one at time.

To illustrate, let’s use this example:  Purchase $55K, Repairs $20K, ARV $100K (this will be a Buy-Fix-Sell)

Hard Money Loan Buyer

  • High Rate & Points
  • 65% of the ARV
  • $10,000 Down
  • Repairs Included
  • Out of Pocket

$10,000 (cost $75K - loan amount $65K)

150% ROI

Profit ($15K) / Out of Pocket = ROI

Cash Buyer

  • $55K Down
  • $20K Repairs
  • Out of Pocket


27% ROI

Profit ($20K) / Out of Pocket = ROI

roiBecause of points and interest, the actual NET profit will be about $5K more for the Cash buyer.  However, the ROI realized by the investor using Hard Money significantly blows away that of the all Cash buyer.  Not factored into the example are standard title company closing costs that will slightly lower ROI for both buyers (title policy, insurance, survey, escrow, etc.)     

Let’s assume both our Buyers start with $100K.  This means our Cash buyer can only do this one deal and is then out of the investing game until property is sold.  The average time for my borrowers to flip a property right now is 90-120 days.  On the other hand, our Hard Money buyer has ability to have multiple projects at any one time while significantly reducing risk and increasing profitability.

Cash Buyer:  1 flip per quarter for $20K profit = $80,000 per year

Hard Money Buyer:  3 flips per quarter for $45K profit ($15K x 3 = $45K) = $180,000 per year

The Terms of Hard Money

Keep in mind that not all hard money lenders are created equal – meaning they each have their own specific criteria and terms.  But more often than not, there are commonalities you will find.

These loans are typically 8%-15% and 3-5 points – which, by the way, is a solid deal for a short term investor loan.  Yes, grandma’s IRA might be a lot cheaper, and if you’ve got it, go for it.  But when you need the money for a smoking deal, a savvy investor will never thumb his nose at hard money rates vs. losing the deal altogether.

You’ll also find that Hard Money Lenders will typically lend-up-to 70% of the ARV and allocate the rehab funds to a construction escrow account that you will draw from throughout the rehab as work is complete.

You should expect to make your interest only payment during the course of the loan.  If for some reason you exceed the loan term, expect to pay an extension fee of 2-3% of the loan amount for an extra few months.  Your hard money loan will generally be between 3-6 months which is plenty of time to rehab and refinance or rehab and sell.

skinCredit and Skin in the Game

A good lender will have solutions for both Flippers & Landlords.  And yes, there are still some hard money lenders who will let you borrow based on the merits of the deal alone.  But nowadays, the better your credit, DTI (debt-to-income) ratio & liquid assets the better your rate and terms will be.

As previously mentioned, investor financing is an ‘investment tool’ and might not initially be an option for everyone. The reality is you still need cash to play this game. You will always have some ‘skin’ in the game and that amount is going to vary per deal depending on the ARV, Price, & Rehab.

In my opinion, the recommended minimum liquid assets/cash to do a deal is $40K. If you don’t have $40K you should focus on wholesaling and other income producing activities until you have saved sufficient reserves. Not having appropriate reserves means you are over-leveraging and your focus should not be on buy-fix-sell or buy-fix-hold at this time.

The minimum loan amount for most of the quality lenders is $50,000. Keeping that in mind means you should be focusing on deals with an ARV (after repair value) of $80K or higher if you want to leverage hard money to do deals.

Why ROI Rules

Going back to the importance of ROI – One of the important things you need to determine is what type of ROI you expect to get on your deals versus the net dollar amount.  In my view, far too many investors tend to get hung-up on a specific dollar amount and say silly things like “I won’t do a deal unless I can make at least $15K.”


I say, the actual net dollar amount is irrelevant because ROI is the true measure of profitability.  The key to maximizing ROI is utilizing OPM (other people’s money) and hard money lets you do this marvelously.

Here’s what I mean…

It is possible that a $15K net profit could be only a 5% ROI and a $5K net profit be a whopping 50% ROI. Which do you think is the better deal?

The ROI for cash buyers is typically less than half of what it is for a buyer leveraging hard money.  It’s all relative.

"Put your hand on a hot stove for a minute, and it seems like an hour. Sit with a pretty girl for an hour, and it seems like a minute. That's relativity." -- Albert Einstein, Genius and Physicist

lineBottom Line

Hard money is an investment tool and one I highly recommend you keep in your tool belt.  Of all the tools and skills to ensure your success in real estate, I truly believe finance is one of two of utmost importance (marketing being the other).  Understanding finance and the role of hard money allows you to utilize leverage, reduce risk and maximize profitability.

Less $$$ Down = More Deals = More Income, More Equity, More Appreciation, More Net Worth

To your success,



Do It To It! Immediate Action Steps

Get Your "Liquid Assets" In Order -- You are going to need cash to get into the game and I would recommend at least $40K to enable you to safely do a deal.  Having reserves is of vital importance because you need money for the down payment, interest payments, and to start the rehab.  If you don’t have the cash, find a partner or family member that does.

Contact Local Lenders -- Reach out to one or two hard money lenders funding deals in your area to start the process of getting pre-approved.  Preferably lenders involved with your local networking events.

Get A Roadmap -- Work with your lender to determine your DTI (debt-to-income ratio) and potential financial roadblocks to achieving your goals.  This will provide you guidance in regards to the ARV (after repair value) of properties you should be focused on as well as your ability to refinance if needed.

Make Offers And Close Deals -- You now have the confidence to make offers and put down deposits knowing you have the funding in place.

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