Financing the Hard Way

There are a lot of people that want to invest but they can't overcome one main barrier ... financing! With the tightening credit requirements of many banks, real estate investors are finding it tough to finance their deals.

Investors can get financing, however they have to realize the new market realities. For small commercial projects, I recommend that investor use a system that has been used for many years by residential real estate investors.

In the past many residential real estate investors have used a strategy of purchasing properties in disrepair, buying them at a huge discount and then fixing them up as rental properties. This same strategy can be used with small commercial real estate.

So how has this strategy worked in the past, they've used a type of loan called a Hard Money loan to finance the purchase and rehab of the property. After work was completed and the property was occupied, the investor was able to get a permanent loan to refinance the Hard Money loan.

Hard Money loans are short-term loans designed to give investors the ability to buy property and fund the rehab. These loans usually run from 90 days to as long as one year. Investors must be cognoscente of the balloon date, the date the loan is due, because the loans can carry huge extension penalties.

Hard Money loans come in wide range of terms, but there are two things you can be sure of; 1.) you will be charged a lot of 'up-front' points and 2.) the interest rate will be high.

These loans are very risky for the investor so they hedge their risk by taking profits on the front when they close the loan. This profit, often referred to as points, can range from 5-10 point or 5-10% of the loan amount.

Interest rates on these loans are often very high as well. Interest rates range form 12-18% with the most common rates being around 15%. While this sounds like an expensive way to finance a transaction, if you don't have cash in the bank, it is a good way to get started.

I remind investors who are incredulous that these lenders charge these high rates and points of two facts. First and foremost, there is a cost for opportunity and if you don't have any cash the expense of this loan is nothing more than the cost of the opportunity.

The second fact I point out to investors is there is a cost to inaction as well. This is what I refer to as the cost of lost opportunity. How much money did you NOT make by not doing a deal because you didn't want to give away a share of the profit to the lender in the form of high interest rates?

Finally I'll close with this thought. Let's say you don't want to use Hard Money to finance your transaction and you find a 'money' guy to partner in the deal with you. What do you think their requirement will be? Would you give them 50% of the deal? Think about it...then give me a call.

Michael Gross is the author of this blog. He is the President of Dividend America Mortgage and he has been a builder, a Realtor, an appraiser and a consultant to Fortune 500 companies on the subject of real estate. He leverages all of his expertise to help investors finance their real estate transaction and create wealth through real estate investing. Contact him a 770-350-7373 or email him at mgross@dividendamerica.com