While hard money financing may seem like a daunting task to the uninitiated, it actually has quite a bit in common with more standard real estate deals that involve a mortgage and traditional lending institutions. Here are the three main steps to financing with hard money:
Hard Money Financing Step #1: Find the Deal
While banks and other traditional lenders will “pre-approve” you based on your credit and income, hard money lenders want to see the deal before committing to a real estate deal. The reason is quite simple – they do not want to depend on your credit for a guarantee to pay. Instead, they want to see that the property is self-supporting in its cash flow and can thus make the payments by itself.
Hard Money Financing Step #2: Find the Funds
Keeping the previous point in mind, a buyer can approach an accredited investor and pitch the deal to them on an individual level. While this approach will work if you have an established network of people interested in these types of deals, it is problematic for the new investor. An alternative is to show your deal to a private money lending institution. These companies provide a platform where the deals, the buyers and the lenders are all vetted as reputable. In short, using a private money lender makes the entire process of hard money financing secure, affordable and available in one place.
Hard Money Financing Step #3: Make the Deal
While a “one stop shop” for finding investors is a great thing, you still have the flexibility to make your own terms and make your own deal. You will need to have your numbers in order – for example, cash flow projections, build-out amounts and exit strategy – to show that you understand the deal. Other than that, it is simply a matter of selling your vision to potential investors.
As you can see, there are several routes to finding hard money financing. If you are hesitant to ask your friends and family – not a bad thing in my opinion – and unwilling to approach more mercenary investors on your own because of the potential downside risk, consider the use of a private money lending company. Not only will you be able to avail yourself to their expertise and experience, but also to the seasoned professionals with which they surround themselves.