Hard money loans and conventional financing are two popular ways of financing investment property.
In this video, Jorge and Rafi explore the difference between these two types of financing, and talk about strategies to maximize your leverage when investing in cash-flowing rental properties.
00:03 Rafi: Good afternoon. Welcome to Graystone Brown Bag sessions. I am Rafi, Chief Operating Officer for Graystone Investment Group.
00:10 Jorge: I’m Jorge Vazquez, CEO of Graystone Investment Group.
00:13 Rafi: Excellent. And again, remember that our Brown Bag sessions are targeted to answer one question from one of our viewers, or clients, or prospects, or partners. But before we continue, where can they find us?
00:29 Jorge: They could always find us, Rafi, at homes4income.com. That is homes4income.com.
00:35 Rafi: Excellent, excellent. And big shout-out to Alex Pagan, one of our investors in Thailand. We were talking with him today. It’s pretty cool, when you have that time zone challenge. We were saying good morning, in his case, good evening, but Alex, definitely looking forward to work with you. I think he’s traveling soon. I think he said at the end of April. Maybe you’ll hear but really, it’s great. I see that Liliana Patricia Armstrong joined. Lily, I hope everything’s great. She’s also a realtor. She’s doing great.
01:12 Jorge: Alright, awesome. Maybe perhaps she has some good questions today, or some input.
01:16 Rafi: Yep, yep. And I see that Jason Fix also joined today. We’re trying to give a couple of minutes for people to join. And remember today, the topic today it’s one that… Man, we have people asking about it. And actually, when I started a year ago, today. Actually, it’s my anniversary with the Graystone Investment Group.
01:38 Jorge: [01:38] ____.
01:46 Rafi: So yeah, one year, one year. And let me tell you… I think me joining Graystone, it’s one of those learning experiences for a lot of people, that I want to share because I think a lot of people are very afraid of change. And if you want to be an investor, you cannot be… There’s gonna be risks but what you need to make sure is that you manage them. Alberto Egal Santiago joined. And I have to ask him… I think he’s mis abuelo. He’s a great, great grandpa today. So, if that’s the case, Alberto, congratulations.
02:22 Jorge: Awesome!
02:24 Rafi: Tan viejo, you’re old. [chuckle] But back to the change. I think it’s how you manage that change, how you manage that risk and how you mitigate it. And one of the ways to do that is actually the theme today. And today, we’re gonna talk about hard money.
02:45 Rafi: Hard…
02:46 Rafi: Like this, hard money. We’re gonna talk about the strategy of how to maximize, that winning strategy in terms of how to maximize your leverage when you are investing in rentals, investing in cash-flowing properties. And I see that Allan McNabb joined. Allan, he’s the brains behind the social media and all the SEO that has Graystone four websites in the first page of Google. It’s all because of Allan. So, that’s great. So Jorge, hard money, is it hard because it’s hard to find or is it hard because it’s hard to understand? What is a hard money loan?
03:36 Jorge: Rafi, that’s a good question and we get that question asked all the time.
03:39 Rafi: Absolutely.
03:41 Jorge: The name says it. It’s hard, in a sense, but it’s easy also in another sense. Pretty much, hard money, the best way that I could describe it is, money that comes from a private investor, just like you and I.
03:56 Rafi: Or a private lender, yeah.
03:57 Jorge: In the more simplest way, that’s the best description. You have smaller institutional lenders that are doing it as well, but pretty much, hard money means private money, less requirements, easier guidelines to be approved for. And that’s pretty much what hard money is.
04:24 Rafi: So, easier guidelines compared to a traditional mortgage with a big bank?
04:28 Jorge: Right.
04:29 Rafi: Now, easier guidelines compared to a traditional mortgage, we have easier guidelines, all that kind of stuff. How about the rates? Because as an investor, I want to make sure that my money is invested at the highest return possible. How do hard money rates compare to traditional mortgage?
04:48 Jorge: Rafi, that’s a good question. Usually, hard money is gonna be more expensive because the way you look at it, just like I said, they’re investors like you and I, so they’re taking more risks by asking you less questions. They’re gonna have to compensate with the higher risk, the higher rate of return. But with that said, most hard money loans are only used as a bridge only.
05:16 Rafi: What do you mean, as a bridge?
05:17 Jorge: Okay. That’s a good question. Bridge, where, you’re gonna be able to utilize the hard money to acquire a specific asset because the timing, usually a conventional lender is gonna take 30 days, 45 days. We have one in particular that took 60 days. When you’re in the investor world, where transactions go in and out by the minute, using a conventional lender is not a good strategy.
05:51 Rafi: Okay. So, when you say bridge, it’s a bridge basically from the moment that you acquire the property to the moment that you sell the property. And that’s why you call it a bridge, right? Because it kind of…
06:01 Jorge: Not necessarily.
06:02 Rafi: Ties in. Oh, so you think it’s even before acquiring the property?
06:07 Jorge: Absolutely.
06:07 Rafi: Oh, okay. Even better.
06:09 Jorge: So one of the strategies… That’s one strategy Rafi, another strategy is utilize it for as long as you need to utilize it for. So in some cases, a lot of our investors, what they do is, they rehab the asset. In this case, the house, they rehab the house. Then once the house is rehabbed, they’ll have an inspection called a four-point inspection to make sure that they don’t go and waste their time with the bank, because the bank is gonna want an asset that’s in perfect conditions.
06:39 Rafi: And by the way, guys, four-point inspection, like for home for income?
06:43 Jorge: Homes for income.
06:44 Rafi: Four points?
06:45 Jorge: Yes.
06:45 Rafi: A/C.
06:46 Jorge: A/C.
06:47 Rafi: Electrical. Plumbing.
06:49 Jorge: Plumbing.
06:50 Rafi: Roof.
06:50 Jorge: Yes.
06:51 Rafi: So when you’re investing, remember those four things are key. The banks, the private money lenders, they’re going to look at those four things: A/C, roof, electrical, and plumbing. So those things have to be addressed at rehab.
07:06 Jorge: That could be a good article, actually, to talk about four-point.
07:09 Rafi: Hey, Allan, I know you’re there. Idea for the next article. What is a four-point and why you should have a four-point on every property? There you go man, good job.
07:18 Jorge: That’s right. Awesome. Awesome. [chuckle] So, like I was saying the… Like I said, usually you’re gonna pay 12%, 13%.
07:28 Rafi: Okay. Woah, woah, woah, woah, woah. 12%, 13%?
07:33 Jorge: Yes.
07:34 Rafi: But I can get a mortgage, traditional mortgage for like 5%… 4%, 5%, 6%. Why do you suggest an investor pays 12%, 13% for a loan that, again, I can get for 4%, 5%, 6%?
07:50 Jorge: Well, there’s a couple of reasons why. But I think that the most important one or the best one is your private lender is almost as if you have your own cash. So having that buying power is one. To be able to say, in a competitive market, to be able to say, “Alright, you got it for 70, but I’m gonna offer you 60 right now, we’re gonna close in two weeks.”
08:15 Rafi: Okay.
08:16 Jorge: So that’s a savings of $10,000 right there.
08:19 Rafi: So it’s all about timing then?
08:20 Jorge: It’s all about timing.
08:20 Rafi: It’s about timing.
08:21 Jorge: It’s all about timing. With hard money, you’re able to move faster, therefore get a better deal, so… And at the end of the day, like you were saying Rafi, you were talking about this earlier, if you only keep the loan for six months because it’s interest only, you’re only paying that 6% out of the annualized 12% because you’ve only had it for six months.
08:43 Rafi: For six months. Okay, so basically, the main advantage, again, it’s timing. It’s, again, if you go to a traditional bank, it takes probably 30 days from the moment that you asked for that traditional mortgage to the moment that they actually disburse the money. And most of these deals, it’s all about the velocity of money. It’s how quickly you can get in and out and one of the things that I know it’s an advantage is that, it’s hard to get another mortgage with the same bank if you’re gonna do another property, hard money, most of the time, they just look at the actual property in time. So you take that one in and out and then you can request the same guy for a loan for the next property right away. There’s not like, “Oh my God, you have to keep this loan for a year or two,” or something like that. No, you pay off the loan. The next day you can request, “Hey, I have another one I can buy.” So it’s all about using the time to your advantage. Now, what… Based on that, then the time of the rehab is super important, right? Because if the rehab goes out, then you pay more money, is that correct?
09:52 Jorge: Correct. Yeah, it’s just like anything you do with hard money. It’s fast money. I would call it fast money. So anything you do has to be fast, obviously, because of the interest rate you’re paying. Then again, I wouldn’t rush it more than six months, any faster than six months, because you have the seasoning, and you can talk about that. This what is seasoning, that they actually have to have at least six months of ownership.
10:19 Rafi: Most of the time, yup.
10:19 Jorge: Most of the time.
10:20 Rafi: Some lenders now have three month seasoning products.
10:23 Jorge: There’s some out there.
10:24 Rafi: So, some out there, yup.
10:26 Jorge: But you wanna have the asset ready to go that you could get the money back. Actually, refinance from a 13% to like a six or seven, and potentially, if you did a good job, maybe you get some of your money back as well.
10:41 Rafi: Right, and think that’s the key because let’s put some numbers into an example. If you buy a property for 50, right? And you rehab it for 20, the key thing, and I think this is something that’s very important, you need to manage that rehab timeline as much as possible. So, if you have a project manager in place, which we suggest you have one if you’re not one, but you wanna shrink that as much as possible. But if you bought low because that’s when you start making money, when you buy, that’s when you make most of the money, actually, when you buy. And you put 20, the hope is that that property appraises at 100, right? Because you did a good job of buying something at 50 that maybe was worth 65, right? Now you put the rehab, you changed the roof, you did some improvements, then you get it at 100. The appraisal is at 100, then you refinance at a longer term, right? Instead of a hard money, you use a conventional, more conventional product at a longer term. And let’s say that they give you 80%. Well, guess what? If they give you 80% of 100, they give you 80,000, your expenses were 70, you’re completely out. And the great thing about that it’s any money that you make on rentals compared to what you invested, which… How much you invested?
12:05 Jorge: Zero.
12:06 Rafi: Zero, so guess what? Your cap rate is infinite.
12:10 Jorge: Infinite.
12:12 Rafi: I want you to go to your bank, and ask them, “Hey, can I have an infinite interest rate on my money?” What do you think they’ll tell you? They’ll probably call the police or the mental institution, the closest mental institution and go, “I got a cuckoo here, go pick him up.” But again, and people, these are not numbers that are way out there. We can give you examples. And we’re not the only ones doing this, by the way. There’s a lot of people out there. That if you use hard money lenders in a good way, you can do that, where again, you buy for 50, you rehab for 20, you sell for 100 they give you 80%. You’re out, and guess what you’re gonna do with that 70?
13:00 Jorge: Re-invest it again.
13:01 Rafi: Re-invest it again and get another profit.
13:03 Jorge: This goes with the misconception of investors looking with a properties that don’t have a big rehab. To be honest with you, as long as the asset could support it, you might be better off with a $30,000 rehab at 15 and at the end of the game you’re gonna have more equity to put away.
13:23 Rafi: And let me tell you a perfect example. We were talking about this week at work here, is if you have one of those four areas. The four-point spectrum: Electrical, plumbing, roof, a/c. Hey, if you get into a house that any of those areas has less than five years of useful life. Some people might say, “You know what? Let me repair that roof because it has five years, I can extend it, whatever… ” Well, guess what? If you replace the roof, and put a brand new roof, you may spend, let’s say, twice the amount. Instead of $2,000 you spend $5,000, 6,000 on a roof. But then, you can show that to the bank, to the appraiser, and say, “Hey, this house has a new roof.” And the appraisal value goes up, which means that you may actually have the bank pay for that new roof. Because when they give you the money, instead of… If you replaced the roof, using the example that we used, instead of 100 maybe it appraised 90. But if you replace it, it appraise at 100, and guess who’s paying for that roof? The bank.
14:26 Jorge: The bank.
14:27 Rafi: Now Jorge I think the next question that I have, investors ask me a lot, is, “Okay, hard money, I understand the concept, but where can I find these lenders?”
14:35 Jorge: Accessibility.
14:36 Rafi: Where can I find these lenders because I’m sure that Chris Lopez that just joined, Robert that shared our video. Thank you Robert for sharing that.
14:43 Jorge: Guys if you have any questions, we encourage participation. This is a [14:50] ____…
14:50 Rafi: But I’m sure Chris and Robert had that question, “Okay, I understand hard money, I get the concept. Jorge, Rafi, you convinced me. Where do I find these people? Where do find these hard money lenders?”
15:02 Jorge: Yes, in reality most people don’t have access to private lenders, and they’re out there, there’s hundreds of them, but most people don’t even know, Rafi, that this option even exists. There’s people that are listening to this right now saying…
15:24 Rafi: Hard money?
15:24 Jorge: “Private lending, what is that?” But I could tell you that we have done hundreds and hundreds of deals with others people’s money. And that’s what private lending is. And it comes with the experience, the networking. You have to think that a big portion of these investors are investors that are in real estate and stuff like that. They’re out there, but you gotta reach out to companies like Graystone Investment Group.
15:56 Rafi: Definitely.
15:57 Jorge: Companies that… Because you also have a lot of hard money companies that pretend to give you a good deal and seem to work, they have a process in place, whatever the case might be, but they fall flat before closing. So you gotta be careful with that. Because now you have an escrow deposit and stuff like that, you saw this great announcement in Facebook, and you went for it. There’s a lot of scams out there so I wouldn’t suggest nobody to go to any of those unless you know them personally or unless you’re working with a company you know.
16:36 Rafi: Right, and I think Robert has a great question. And I’ll answer that, Robert, in minute. Hard money, where can I find it? That’s where relationships matter. That’s where you need to make sure that you have a great relationship with your financial advisor. Because, by the way guys, you can go to Google enter “hard money lender” and you will get, not hundreds, thousands of replies. But it’s that relationship with your financial advisor. It’s that partnership with companies like Graystone, where you actually have someone vetted. Someone that you know has the information, has the experience, has gone through situations like the one you are. And it’s an expert. There’s hard money lenders that actually specialize in some of properties, in this case, rentals. Some of them specialize on flips. So the relationship matters a lot.
17:33 Jorge: I could tell you that [17:34] ____ area… There’s so many portfolios, so many different guidelines for… Specific to a different states. So you might get excited, you might see an announcement somewhere, some marketing somewhere saying, “Well, we’re doing 100% private lending in Florida.” Okay, but what is the LTV, what is the debt-to-income, what type of asset they’re looking for, does it have a minimal loan amount of 100.
18:01 Rafi: It’s [18:01] ____ links.
18:03 Jorge: If you don’t know what you’re doing, you’re gonna pay their fee, get things going and lose the deal anyways.
18:09 Rafi: Now Robert has a great question, “how about international clients?” We have, like we said at the beginning, Mr. Pagan; we have people from Canada, a lot of investors from Canada, UK. In terms of internationals, can they get access to hard money lending?
18:29 Jorge: Absolutely, absolutely. The first step is to at least set your LLC, pull your LLC in place, and then you pretty much treat it like anyone else.
18:42 Rafi: And this is how hard money lenders are different from traditional banking, the flexibility that they have in terms…
18:49 Jorge: Asset-based, asset-based.
18:51 Rafi: Yep. It’s asset-based, so if you have an LLC here and the assets are there, guess what? It’s something that hard money lender will do versus a traditional lender will be much harder to do something like that. We’re just going through a process where we’re trying to open a bank account. Thankfully, we have a great relationship with our bank with Chase.
19:15 Rafi: And they’re doing it but it’s been hard, it’s something that has been very hard, so you need to have those relationships. At the same time, I wanna send you, Robert, Allan just shared a link in our video to an article that we have about internationals. Why the international people are buying in Florida and it tells you, again, the importance of sending that LLC, and again, how can hard money lenders help you with situations like this? So in that regards, Robert, the answer is yes, foreign nationals can invest in Florida and have access to hard money lending. It’s just a matter of making sure, again, that you’ve set up that LLC the correct way, and that you partner. If this is the first time you’re doing it guys, I know that the temptation to go to Google and find that one guy, it’s there, partner. The first time, find someone that helps you. And by the way, we have people that have started with us and then they have done it by themselves after that, that’s okay.
20:15 Jorge: For hard money and international buyers, you almost need a sponsor, and that sponsor is your property manager, because the hard money company’s gonna say, “Well, I’m gonna lend you the money, but who’s gonna manage this asset?” So it’s important to have a company like Graystone Investment Group to help you because they know they’ve got the quality of deals and how we do the management and stuff like that.
20:38 Rafi: Right, and let’s answer one last question because we always promise you 15, 20 minutes. From Robert, “can we use hard money for multiple units, five plus, light commercial?” What’s the answer?
20:50 Jorge: Yes, you can pretty much use hard money for anything. [chuckle] Hard money, remember guys, hard money are just investors trying to do the same thing you guys are trying to do, gain as much return as they can in their investment, but the more complex, the more restrictions, and the more complex, the more out of your own pocket you’re gonna need to put. For commercial, just think of 50/50, anything bigger than 25 units, 60 units.
21:18 Rafi: I think back to the same thing that we have talked about in terms of property managers: Find one that specializes in that. You’re gonna find hard money lenders that specialize in light commercial, multi-family units. Robert, to answer your question is, yes, there is hard money out there for multi-families and light commercial, and commercial. But, our suggestion is make sure that that lender has done it before, so that they have experience on multi-family complexes, and, yes, they will give you the money but they understand that it’s a different asset compared to a single-family home.
21:52 Jorge: And set up a team. Set up a team because the lender’s gonna ask you who’s gonna be your property manager? Who’s gonna be your rehab? Who’s gonna be doing the rehab? Are they licensed? And if you don’t have that stuff together then they’re not gonna take you seriously, they’re gonna be like, “Next.”
22:09 Rafi: Excellent. Don’t forget to share this video in your timeline and follow us… Donde? Here, somewhere there, follow us. That way next time we are live, you can get a notification. Thank you very much to everyone, Robert, Allan, that made questions, and where can they find us?
22:30 Jorge: Guys you could always find us at homes4income.com. Homes4income.com. We’re open to any questions you have about private lending.
22:41 Rafi: Absolutely.
22:41 Jorge: Give us a call and take it from there.
22:43 Rafi: Absolutely. So again, see you next Friday around this time for our next Brown Bag session. I’m Rafi, Chief Operating Officer of Graystone.
22:52 Jorge: I’m Jorge, CEO. Thank you so much.
22:54 Rafi: Thank you so much and see you next time.
22:56 Jorge: See you.
22:56 Rafi: Bye.
Graystone Investment Group
Graystone Investment Group is an experienced real estate wholesaler in Tampa Bay. We serve clients who flip homes in as little as 30 days, as well as clients who hold high cash flowing rental properties.
Unlike other wholesaling groups, we provide clients with a turnkey process at no extra charge. We find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years.