Hard Money Lenders VS Private Money Lenders (Part 1)

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[Music] hard money lenders and private money lenders are not the same thing no matter who tells you they are guys they are not there is a massive difference as well as there's a huge difference at the end of the transaction in your bank account as well as your time and stress in the deal if you're using a private money lender there's actually a hard money lender I'm break down the difference on the board behind me there's a reason to hard money lender want you to believe that their private money lender but they're not you're out there it's REI clubs you're looking for private money you're out there in the marketplace because you're trying to go from hole setting up flipping or you're just jumping in the business and you're watching videos like this you're hearing people say you need to use other people's money raise private money use a private money lender so you go out there to the marketplace and go into a seminar a local event and you have an individual come up and tell you that they're a private money lender here's how you know they're a private money lender or hard money lender pretending to be a private money lender I'm gonna show you this in detail so we go through these bullet points one by one then we wipe this down do some number a number of case studies so you can see the real numbers and they says part 1 of 3 this whole week guys we're gonna be doing lending videos it's important to understand if you're going to really be successful in real estate what type of money have matters when it comes to how much money you make second video is gonna be private when you versus hard money loan we're we're gonna be having a higher interest rate for the private money loan but still doing better than a lower interest rate with a hard money loan it's gonna be interesting so I'll put that in a couple days and then the third video I want to put out this week is the difference between debt based financing and equity based financing what's the difference should you use a joint venture equity partner or use debt based only and it's gonna shock you when you see the difference okay now to dig into this one guys this is so important to understand they're not the same thing I don't care how many hard money lenders tell you they're private money lender they're not and here's what here's the reason why hard money lender is a professional lender or money broker now is there anything wrong at all with a hard money lender absolutely 100% not they serve a big part in our industry and I use hard money lenders today in fact I wouldn't be here today if it wasn't for hard money lenders now I try to use all private money lending a private money lenders if I can but not always is that possible sometimes you need a quick hard money loan to close on transaction when your private many lenders are tied up or they can't do the deal or don't want to do the deal so there's nothing wrong with our money lenders so you want to use a private money lender and you'll see why but it's okay to use hard money lenders you just can't do as many deals and you're gonna see why the said so traditionally this is probably the most common hard money loan ice-t across North America I traveled coast to coast ocean to ocean I seen as low as one in eight as high as five and fifteen we're talking about what I mean by five and fifteen two and twelve three and 14 now the traditional private money loans we're gonna talk about this as well but we're gonna use 12% for the case study here in a second so a private money lender is most commonly a mom-and-pop lender this is a friend a family member a neighbor a friend of a friend a local business owner that has extra money they don't want to put in stock market other investments they want to put it into real estate and they're one to lend to you now a lot of times private money lenders are living to hard money lenders and hard money lenders are brokering that private money lenders money they lend to them at 6% to the hard money lender and they turn around lend that money out to you at two and twelve so here's how this looks hard money lenders most commonly are using big credit lines other people's money real private money lenders or a combination of all these and their own money sometimes they use their own money a lot of times a hard money lender used to be a house flipper did a bunch of flips learned how to raise money and did so well throughout their career so they raise a lot of money and said let's just lend that money out instead of doing these deals on their own because it's easier to do so instead of working with contractors much quicker much less stress and they can make more money it's much more passive of a business now what you need understand about private money lenders is their most of time using their own money but one of the problems is even though they use their own money it's better to work with them they don't have unlimited amounts of money there's a hard money lender but a lot of times they have a lot more money because they're using a ten million dollar credit line or they've raised a lot of money somehow so they can run out of money but they're better to work with if you can now here's what I mean by points upfront these are called origination points so when you see two different numbers the front number is prior to closing or to get into the loan this is how many origination points you're going to bring to the clothes so if it says two and twelve and you're borrowing $100,000 total two points of that hundred percent would be two thousand of that hundred thousand dollars if that makes sense it's a percentage point one point up here one point of a hundred percent if that makes sense so it's 12 points on the back end still that would be 12 percentage points out of a hundred percentage points for the year so if you're doing a two and twelve loan you're borrowing 12% for the total loan or 1% a month so if you borrow $100,000 at 12 points on the back end that's 12,000 dollars for the year or 12 percent of a hundred percent which would be 1% a month or $1,000 a month to have that loan so if you're borrowing a hundred thousand dollars you're paying two and twelve you're gonna pay two points upfront rigea nation points right here typically you see two to four points to hard money loans that's two points up front to thousand dollars with twelve precision point for the year or twelve thousand dollars to own that loan fourteen thousand dollars for a one-year loan if you ran that loan for 365 days that's kind of how that works now I know you guys are gonna see different interest rates and loans across the country different markets have more money in them more pressure higher price points but most of time you're seeing between two and four points and for the total loan amount you're seeing between ten and fourteen common loan is two and twelve 3 and 14 I've seen as high as 5 and 15 on the East Coast and I think I mentioned this earlier a 1 and 8 on the low side I've seen as well now why do you want to use private money is because most the time you pay zero points my private money lenders I pay no points upfront I just paid 12 percent I just pay 10 percent I just pay eight percent I just pay 6 percent whatever I'm paying them I'm not paying points up front so if you're at an REI Club and you have a supposed private money lender trying to charge you points upfront and all these extra fees does it sound like they're mom-and-pop investor or mom-and-pop lender where they're just now getting the business they're trying to lend they're only $300,000 out no they're asking points up front most likely every single time they're professional lender they're harmonii living now the points on the back on the back end you're going to traditionally see 10 to 14 points for a traditional hard money loan the reason why you wanna work with private money is a lot of times you're seeing six to ten points and you're getting in a lot lower and here's an easiest way to understand this you're going direct to the source think about a wholesaler what a wholesaler does they're going direct to the seller they're getting a house under contract for a hundred thousand they're coming to you the landlord or the house slipper and selling it to you for 110 120 thousand they're going to wreck the source much lower much better so think about what a private money lenders you're getting six to ten so let's say they're willing to lend you money at eight percent but they come across a hard money lender first and they say lend your money to me at eight percent and this person Jack's it up and adds two points on front and ups the rate to 12 percent so they take eight percent over here relate to the hard money lender and they loan out to twelve their credit spread and that's where the profit is and that's why their professional business or they're good at raising money they get to them first just like a whole stairs good sourcing deals they get to them first but they're saving you time now that's why if you can only find a hard money lender and that's the only thing you can use just do the deal if the numbers work and you can make money but this is why you won't work with private money leaders lower interest rate most of the time not always but in the case study on the next video I'm gonna put out I'll show you why it's okay to pay more and you're paying the points upfront now here's what you interesting as well appraisal is a fee usually 300 to 400 dollars in most markets I've heard as low as two hundred at first highs five hundred people paying but a professional hard money lender is doing a lot of deals and there are a lot more diligent and they've had a lot more that breaks the lending business they're gonna make you usually have an appraisal not always guys I know some of you like when my hard money lender doesn't make me do this so guys there are exceptions to the rule of hard money lenders they're all different business owners some of them make you pay points every single month some of them will let you roll and pay all the points on the back end alone some of you are going to make you have no inspection no appraisal some will but traditionally I'm talking about the most common one you're gonna see in the marketplace they're gonna require an appraisal which is usually three hundred four hundred dollar fee for you out of pocket so if you did 10 flips that's thousands of dollars three to four or five thousand dollars a year in appraisal fees which is a lot of money when you can spend that money to jury another forty thousand or flip because if you spend four thousand dollars mark and buying another house and make 40 grand you can see it's not about how much money you spend today or keep today it's not what its cycles and compounds into so over here usually no appraisal extra fees so a lot of times a hard money lender is gonna have extra fees around closing but they're not gonna have they're gonna have inspection fees right so rehab draw inspection fees so we're talk about rehab draws in a second so they're gonna release your repair money to you and drawers and every time they go out they want to inspect the property they can charge you between 100 and 300 dollars a time so they have inspection fees and then they're just gonna have all the appraisal fees they're just gonna have extra fees in general if that makes sense just expect that over here they're not gonna have any extra fees worked in they're just gonna lend you the money you get your money closing you get your house you go fix the property stuff they get paid back there's gonna be no fees no extra junk fees okay now inspection they're going to want you to have an inspection most of time not always but a lot of them really want you to have an inspection if they're new or if they're working with you new in the relationship I guess you could say and they don't know if you know what you're doing enough they're gonna want you to have an inspection have the foundation checked have the roofing check they're not just gonna take your word for it and they're too busy to go up to every single property especially if it's far from them they're gonna require an inspection done you're gonna have to spend the inspection and appraisal so yes you're gonna have an inspection and appraisal they're just going to trust you they're gonna trust that you're the expert which is why they're lending their money to so you can see no no no I'm pretty much everything that's a lot of money adding up in your pocket is lot of stress that you're having to avoid it's no inspection now here's we're talking about with the rehab draw process and the releasing the draws and why this is important for you and to understand the difference so let's say you're borrowing money on a property you borrowed $100,000 to buy the property $50,000 to fix it up when I get a hard money loan for some private money loan they're going to hold this $50,000 to repair back they're gonna hold it in an escrow account and I'm going to get it in drawers so I'm gonna spend three to five thousand dollars they'll release it I'm gonna spin three to five thousand dollars they release it so I spin the money at pocket in front of myself they come inspect it they charge me an inspection fee and then they'll release that money back to me then I go spend that money again they'll release it back to me so back and forth back and forth they're not just gonna give you your fifty thousand dollars at closing but over here when I go to closing I have $50,000 check in my hand with a lot of my letters I walk in with contract where I have almost no money down to get that deal maybe $100 total to get into that contract and I walk out closing with the house fully funded a full repair check in my hand and no extra fees that is why you want to private money lender and why you need to learn how to raise private money over here you're gonna have extra points upfront extra fees and costs extra time in the deal and they're gonna hold your money back to make sure that you know what you're doing they're only gonna release it to you a little bit at a time usually the draw release is between three and five thousand dollars is what you typically see with an individual releasing as far as Parmalee lenders they're gonna make you spend three to five thousand dollars out of pocket you spend that money they'll you prove that you just did the floors they'll have an inspection done to charge your feet and then you're gonna get that money back next step of the project get the money back step by step but you're not going to get upfront which makes the massive headache and bigger time burden and more cost with peace now the last big thing that you're going to know is the difference between a farmland lender private money lender how to know if they're really a hard money lender but they tell you private money lenders they're gonna want some type of insurance or security deposit or what we call a temporary down payment or down payment usually this is between five and fifteen percent that's on the high side that's on the low side most of the time you're paying 10% temporary down now what does that mean think about when you rent a property out you take one month security deposit front and you hold that in case the damaged property they usually want you to put 10% down of the total loan amount so if you're borrowing a hundred and fifty thousand dollars they want you to keep fifteen thousand dollars upfront at closing or you're gonna I mean in an escrow account you're gonna hold that back until the project's done and you can prove that house is fully completed once it's done good to go and list it they release that back to you but it's insurance for them to make sure that if you try to skip town or you don't do something right and you messed up on a project messed up on your numbers or you did bad work that you have to do it again they're not taking as big a risk so they're gonna have a temporary down payment how much do you think a private money lender is gonna charge you for a temporary down payment zero so these are real deals that you're going to see here in a second as far as the numbers going side by side with these criteria and why it's gonna be a big difference to you think about it if you're leaving ten percent of the deal you having a fun part of the rehab upfront extra fees and extra points up front and over here you're bringing no extra money no extra fees no temporary down payment how many more deals can you do if you're working with private money lenders compared to hard money lender I'm going to show you right now now you know the difference between a hard money lender and a private money lender let's look at the real impact using math on your business in the main point of today's videos how many deals you can do because the cash out of pocket you have to bring to the deal this is going to shock you when I start raising private money my business exploded I was stuck in a rut I couldn't scale my business because it takes time to do a transaction we're gonna use a six-month loan comparing 150,000 our total loan fee with two different lenders hard money lenders versus private money lender now if you mate to this point the video I appreciate you doing so could you hit the like button guys I appreciate if you learned something that you do that helps the channel grow it helps these videos it really does now also it makes me feel good when I see the subscribers go up because it means I'm helping you guys subscribe channel if you have done so hit that notification bell as well now let's look at the real math here same house one hundred thousand dollar purchase price so you went under contract with the homeowner for let's say $100 option hundred dollars from your ten dollar option whatever it is it doesn't matter a very small amount $100,000 purchase price fifteen thousand dollar repair cost that's how much it's going to take to put in the property three pairs labor and materials to get the property to hopefully sell for it's after repair value or market value of 225 thousand one stick step now we're going to assume that we did it in six months that's still longer than you'd like to do but most people starting out in real estate are gonna spend at least six months doing their first couple flips are one hundred fifty six month loan to 225 thousand sales now over here let's look at the map between a hard money loan and the big difference of why you can't do as many deals and why it's going to slow your growth of your business we're due to 12% over here but over here we're just gonna use 12% with no points upfront which is why you wanna use private money lenders origination two points on one hundred fifty thousand do the math guys it's three thousand dollars so just to start the loan process they close on this property you're gonna have an extra three thousand dollars compared over here it's a lot of money right that's enough to buy it spend marketing to get another deal now we're going to do a six-month loan so 12% $150,000 would be $18,000 if you do the math on that but since we're doing a six-month loan that would be per annum or annual year we have to divide it - so you're gonna have $9,000 throughout the course alone that you're paying monthly hopefully you find a hard money lender that lets you roll that to the back of the transaction so you don't have to pull out a pocket so that's a something you need to think about when you're looking at formerly lenders is do they make you pay the points throughout month by month or can you roll it to the back end ask them when you're interviewing them so $9,000 their course alone now this is a big difference why hard money lenders can cause you to have slow slow growth in your business most of them want to temporary down I know some of you guys are like my donor does it do this not all of them do so look for ones that don't and some require less in the deal some only require 5% but most require a 10% security deposit insurance temporary downs they call it and they hold it in escrow account so 10% of 150,000 is $15,000 that means you have to pull out of your pocket put $15,000 into an account so they can hold that as insurance in case you do something wrong run out of town botch the job something goes wrong they're protected mm-hmm think about that it's not just 15,000 you pay taxes too before that to create disposal income to have that $15,000 after taxes so it's more than that to leave in this deal that's a lot of money and this is why you can't scale using hard money lenders very easily and then the second reason it's harder to scale is because you have to fund the first part of the repairs which is called a rehab draw before before they give you their reimbursement which is called the rehab draw so let's say you borrow 50,000 they're not just gonna hand you $50,000 that you can go and start fixing property they're going to require that you fund the first part project let's say I spent $5,000 on a roof they're going to want to see the receipts they're going to charge you an inspection fee they want to see the pictures they want you to prove that you that $5,000 so you paid 5,000 to do the roof you prove the lender out of that 50,000 they're gonna reimburse you 5,000 now the whole 45,000 back now you go spend $5,000 on the next part of job they reimburse you back and forth back and forth and every time they do there's inspection there's a little hundred dollar seventy-five dollars two hundred dollar inspection fee so find out what the inspection fees will be very conservative just say it's a three thousand dollar approval amount before they release the draw so you spend three thousand that pocket start then they reimburse you and then remember most of them want an appraisal inspection not all of them do guys find the ones that don't if you can because there are better hard money lenders than others but a lot of them want you to pay for an appraisal and inspection and fees so we're gonna be very conservative just eight thousand it could be much higher especially if they're charging you lots of inspection fees so total costs to do this deal for six months it's thirty one thousand now think about how much money you bring up front this loan part right here is paid throughout the project hopefully roll to the back end but you're gonna bring the origination points in front the Tipperary downpayment the rehab draw in this up front let's take thirty one thousand last nine thousand and that's how much you're bringing to the table out of pocket so what would that be so that'd be twenty-two thousand dollars my math is wrong don't left me so you have twenty two thousand dollars to do this deal so do you have twenty two thousand dollars laying around and if you do and it goes to this deal how many deals can you do let's say you just had twenty two thousand you could only do one deal let's say this deal came up three times in a row you would need sixty six thousand dollars to do those three deals this is the big difference here's what you need to see over here so you have a hundred dollars earnest money in ten dollar optionally I literally walk into a transaction with 110 dollars out of pocket I walk in this house company with a contract and I walk out with a house fifty thousand dollar check in my hand I paid no points upfront this is equal nine thousand throughout I pay my lenders monthly this is gone the rehab draw is gone because I got all my repaired pup repair cause right at closing I walk out with a 50 K minus extra piece for closing cost etc and then this is gone because I didn't have this so I pay $9,000 just like I'm doing over here but I didn't have any money out of pocket so if you had twenty-two thousand dollars in your pocket when you start the deal and you have five deals come across your plate you'd have to pass on four of them are wholesome or do something else else with them you can only do one deal if I've been able to raise a lot of private money and I had two million dollars of private money raised how many deals could I did two million about five hundred fifty thousand really however much private money I have I don't need money at a pocket now the way you can fund this out of pocket over here is through credit cards or credit line we have another video guys go to investor army go to youtube type of investor army gap funding and you'll see how to do that that's what people use their credit cards to credit line for but you're really limited by the amount of money over here and this could technically be on limited as long as you are good at raising private money so now you see why it's so important to know the difference and why you need to spend more time raising private money than finding deals because it doesn't matter how many good deals you find if you can't do those deals I hoped you liked the video guys I hope you understand the difference between private money and hard money now and why this is so important also there's a big reduction in time and stress over here as well and that is the video subscribe channel if you liked it guys tomorrow or here a couple days I'm gonna put out another video breaking down another comparison like this it's gonna be interesting and then we're gonna do another video on debt based financing first equity based financing and if you don't know what that is check back in a couple days to see that video as well have a good night [Music]
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Channel: Investor Army
Views: 10,692
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Keywords: Hard Money Lenders VS Private Money lenders, Hard Money Lenders, Hard Money Loans, private money lenders, private money loans, Hard Money Lending, hard money lender, hard money lender for, hard money lender for real estate, the difference between hard money lenders and private money lenders, Lending, Loans, private loans, no credit check loans, real estate loans, hard money lenders for investors, bank loans, Hard money, real estate investing, private money, lenders
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Length: 21min 49sec (1309 seconds)
Published: Mon Jan 27 2020
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