The Three Types of Financing: Conventional vs Hard Money vs Private Money

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This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property for panties on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now, here's your host CEO of We Close Nodes, Scott Carson.

Good morning, good afternoon, good evening everybody. Welcome to this episode of the Note Closure Show. As always, Scott Carson. Excited to be here with you today. In this special episode, it is hard to believe that the year is coming to an end. We have what, just under, just, just over a month left in 2022 versus that big daddy new year rolling at 2023, the year that we've all expected to be the land of milk and honey when it comes to being a note investor. But I wanted to talk about this episode. It's something this target. This episode is actually about something I have not done in years and I've always surprised I've kind of talked about specific little things along the way. My first ever video series on my old YouTube channel was about the difference between hard money and private money. And that's what this episode will be about. The differences we see in today's world for hard money lenders, private money lenders, and also conventional funding out there. And as a real estate investor, it's really important for you to know the difference and know when to leverage which one and if you have access, which one can be the better and more beneficial to your portfolio long term. Because I've had the conversation with a few students lately as they're looking at a deal, a note deal or a property and they got one type of financing in place. Doesn't mean it's good financing for a long term. And some of these financing programs, hard money, private, conventional, have different advantages and very different disadvantages too. You, you know, you don't want to use one for one specific thing. All three of them have different kind of mindset or different kind of functionalities when it comes to your funding. And you need to know what your funding is going to cost you when you're buying a deal. I mean, I had another call today with a guy, he was like looking at a note deal and I'm like, well, it's a BK chapter 13. It's going to probably pay you based on the numbers we're calculating about an 8 and a half percent percent return based on the BK chapter 13 payment based on what he's paying for. And so he goes, well, I've Got investors. Oh great. Have they? Do you know what they want as far as interest rate or return? No, I don't. Well, if you don't know what your investors want, you don't have an investor. And I can't tell you, I told this guy that many times before. Like you got to know your investors, did they fill out the, you know, profile investor questionnaire profile. Have they sent a proof of funds? And the answer to that is no, no, no. If they haven't filled that out and you've asked it twice, they're not going to fill it out and they sure as hell not going to fund. But anyway, let me digress and get back to the main nuts and bolts, the meats and potatoes of today's episode. Now there's really three kind of financing things. Obviously we are all very familiar with conventional mortgages is the first aspect of things. And you all hear about what' on the news. With conventional mortgages and interest rates going up to 7, 8, maybe 10% by year end, who knows. Now with conventional financing that's pretty much going to be your a paper lending. That's going to be bank financing. It means you're going to jump through the hoops, you're going to provide. You know, it's based on your credit score, it's based on the value of the property. You know the most that they will probably fund depend on the lending type based on your FICO score as well. It's probably 90, 97, 95 somewhere around there. It's gonna be the lowest interest rate you're probably gonna see in, in you know, previously, you know, 2% mortgage rates, 3%, stuff like that. We've been lucky and blessed in the past. But that's going to be your conventional financing where you probably have to bring the least amount of table. They're usually going to be, you know, you're going to be, you know, fully guaranteed. You're guaranteeing that mortgage. They if you don't pay and they foreclose, they're going to take the property back and then possibly come after you for a deficiency judgment of some sort is what we've seen in the past. But that, you know, you're gonna have to provide bank statements, tax returns for two years. A lot of guys are going to proof up on your income, proof of employment, you to get this low interest rate financing previous you had to jump through a lot of hoops, especially like a full doc, we would call that where you had to provide everything, credit scores, sources, season of funds, two years of payment History making sure you have a previous mortgage late. It's all based on your FICO and you personally. And then also does the property meet the type of lending? Because there are specific lending programs are different for condos and townhomes versus single family homes or duplexes, triplexes or fourplexes. So conventional financing, that's often the hardest to get. You got to have a clean record and usually need to have pretty decent credit scores in the mid-600s and beyond. Okay. Now it doesn't say you can't get conventional financing if you have a lower than like a 680 FICO score. You can, but it's going to require you to either a bring more money to the table or a have a better price point that you're buying that asset with conventional. Conventional financing is not going to go off after repair value. They're going to do as is to make sure the property is habitable, it's finished. You're not usually going to get a conventional loan on a rehab project. I mean you can do a 2 or 3k loan which allows for I think up to like $35,000 in repairs as part of it, but not like a full rehab or gut job. But you're definitely not going to be able to use conventional financing to buy a not. Okay, that's the first, that's always the hardest spot. Conventional financing could take 30 to 60 days for a single family home or residential. Commercial is going to usually take a little bit longer because you have a lot of different things you do environmentally. Okay. Now the next step up from there a lot of investors go to is the hard money side of things. Now hard money is a short term loan and by short term we're talking six to 12 months, maybe a six month renewal, maybe a 12 month renewal. So you're maybe into the deal for 24 months at the most. Usually it's going to be somewhere around a 10 to 12% interest rate. So the interest rate is often quite a bit higher and you're going to pay a couple points, you know, two, three, four points to the hard money lender and they're making their money off the points. And the difference in the interest rate between what they're charging you and then what they're paying their investors that they're borrowing the money from to lend it out. The great thing about hard money lenders is it's based on the property almost exclusively. There are some hard money lenders out there that are checking scores, checking experience. If you're brand new, you may get A little bit lower ltv, you may actually pay a little higher interest rate or one or two more points of your inexperienced hard money lender is going to go off of as is and after repair value. Most of the time these hard money lenders are going to finance either a 60 to 70% of the after repair value or depending on where you're at, they may finance, you know, 60 to 70, sometimes up to 80% of the purchase price with the requirement you're bringing that extra amount to the table. Now most of the time, hard money lenders, like I said, it's going to be a 12 month loan. It's really designed to be short term financing. More so on the fix and flip side, you don't want to be into a 12% interest rate mortgage that's only good for 12 months and then a balloon happens and then it term is in there 12 months. If you're buying like a fix and flip or a, a property that you're fixing and turning in a rental or an Airbnb or something that you want to hold long term, you want to try to have better rates on your money long term. Now like I said about hard money loans, they may also require you to have, they may finance some of the repairs, they may hold those repairs back in escrow and as you complete things, they reimburse you for that stuff. You know, some hard money lenders will do mezzanine loans, especially in areas like California, Nevada, where they, you know, they may bring in a second lien on the property to help you with your financing if there's a good first lien in place. But hard money is usually a faster type of response, usually 30 days or less. Many hard money lenders on a single family property can usually do it in seven to 10 days. We see it done as fast as three, but seven days is pretty normal. With a conventional mortgage. The lenders are going to order a BPO and a full appraisal. A hard money lender may order appraisal or they just order a bpo. And if you're doing a rehab project, they're going to want to see a full extent of repairs and what your bids are to that and see if it makes sense and what they're doing. Like I said, hard money lender is pretty easy, but it's just based on the property. You're not going to get a conventional loan for a note or usually a hard money loan for a no deal. It's all going to be property in itself. Okay? And like I said, it's you know, the more experienced you are is a hard money lender. They may give you a better discount on the rate discount the points they may, after 12 months they may want you to pay a couple points, two or three points to renew that loan for another six months if it doesn't sell. That's something that you risk. Make sure that your days on market, make sure you're not over rehabbing the property. Make sure you're not, you know, rehabbing the property above what that that market is, what that block is, what the other properties are in that area. We see seen a lot of new time investors who take out hard money loans. They over rehab the property and they put too much of their own money into it and they can't sell it for what they owe, you know, what they put into it. They can sell it for what they put into financing with a hard money lender but they may be stuck chuck on taking a loss on the repairs because they over repaired it like they were going to move into it. That's a big thing you want to do. But hard money lenders, like I said, it's usually going to be somewhere around a 10 to 15% cost of money for a year, 10 to 12% on the interest rate and 2 to 3 points and 1 point is 1% alone. So it's $100,000 loan you're paying. If you're paying 2 points, you're paying 2 points in origination fees. The hard money lender and harmony lenders making their money on the, like I said, the points, the amount that they renew this money, they want to do these deals every 6 to 12 months and then really rinse and repeat their money out there. Now private money is probably the most flexible for investors out there. Private money is lend. You know, you're borrowing money from an investor like you and me, somebody who's got 50 grand, 100 grand, 200 grand, whatever. They're a private investor who has capital they're glad to lend out. And a lot of private investors will lend money to a hard money lender and hard money lender will take their money and go out put in projects. Other private lenders are very flexible when it comes to the project. You don't usually want to be in above 70% of value. You can use private money or IRA money to purchase notes. Use private money to fund a piece of real estate conventional. The interest rate is going to vary depending on how savvy you are a negotiator and how experienced that investor's money or they are as an investor and what they've done in the past, if you've got a, a very active investor who's got some money inside, they're probably going to want 10 to 12% which is okay for short term but not long term deals. If you're dealing with investors got money, you know, sitting in an IRA that they've not touched for a while and never done anything with it in two or three years, they may be very happy getting 5 or 6% or 7% on their money because it's at least earning something versus losing money in inflation or fees that they're being charged from the, you know, the custodian, the servicers. Especially if it's a self directed IRA company. There are some things that we keep in mind with our private money lenders. Like I said, we never buy above 70% of value. We're only buying first lien. So if something happens we can foreclose and still have plenty of equity and be in the driver's position. You know, you're going to put insurance on the properties either which way. All three of those categories will make sure you're putting insurance on the property protect. In case of an act of God or something, you're closing that. Title companies with hard money lending and conventional lending. Private money lender, if you're buying a piece of traditional property, would close at a title company. You're buying a no deal. It's a wire to either your escrow account or wire out to the fund selling the note. All right, same thing. You're going to be secured with the first lien on conventional financing. Hard money lender because they're only buying real estate. If you're buying a piece of property with private money, yes, it'd be secured with the first lien or if you're buying a note, you would secure it either with being code named on the assignment or a collateral assignment. There's other ways to secure that investment of the private money lender. Private money lenders can be short term, six months, 12 months, it could even be extended. It all depends on the needs of that lender. And that's why it's important for you to talk with that private lender and ask them what are they looking for on their money, what kind of returns, how long are they looking to tie it up? You know, with note investing, most people think oh, I got to be into it for 30 years. That's not the case. Now. Most of our deals are usually 24 to 36 months. But if investor is happy tying it up for five years, like in a CD and they're happy getting 5% or 4% or 3% or they had money in a CD making 1 or 2% and you can offer them 3 to 4% for five years. That's a bonus to them. They don't have to do anything. I can double my money with what their comfort is. So that's the important thing. Asking private investors how comfortable they are, where their risk factors are, what are they looking for, what have they done? I mean, it's, you know, I don't want 6% of my money. I'm going to want 12% of my money, at least at a minimum. So I may not be an ideal money lender for somebody who wants to do a long term project. Short term would work well. But this is why you need to know the difference in these three. What's it going to cost you on a monthly basis? I had a coaching call with one of my students who's buying a property and he wants to turn it into an Airbnb. He's going to do a long term rental. I'm like, that's great. What's, what are you buying it at? Okay, and then how are you financing that? He goes, well, I've got an investor. Hard money company is going to fund this at 12%. I'm like, that's not a good long term strategy because your money costs are going to eat up most of your profits. So you're, instead of you having, you know, having a 6% interest rate with long term financing, you're going to lose most of your profits, that interest rate, and then what are you going to do after a year? And he's like, I don't know. I said, well, you got to have this lined up. And this is why that route makes more sense for him to probably use a private money lender on the front side and then work to convert that asset, that loan to a conventional mortgage with his local bank. Because the investors got good credit and stuff like that, but they're not going to finance the purchase on the front end side. Or there's always the fourth way that we don't talk about working to get terms from the borrowers on these properties or these assets. Maybe you can get the seller of the property or the note to offer financing for a period of time that's not so bad. There is a group out there that's financing note purchases, but they're financing at 75, at 12%. And I'm like, that's okay. It's great to get the deal done. But it's not a long term strategy to cash flow on those assets. It may work for non performing deals that you're foreclosing on, but that's a pretty expensive price. Especially when you got to come up with the other 25% of the purchase of that asset, your cash and cash gets really reduced on there. So look to develop your private money lenders list. I mean you can find hard money lenders by talking to your local rea class by going to reiclub.com and looking at hard money lenders. If you type in your city hard money lender, talk to title companies. There's many title companies that deal with investors that are very familiar with hard money lenders out there. And hard money lenders will lend. Many of them will end in just one area. You know, some like we got some here in Texas that like will do lend in most of the major cities. Others will do stuff all across the country because they've got a bigger platform and bigger resources. Private lenders are going to merit based on if they trust you and if they can get their money back. If the deal sounds good, then their principal secure, they expect to get their money back. They can trust you. And the third question or the fourth concern is often you know not what, you know what the interest rate is. If you can build like and trust rapport and you have a deal that makes sense and it looks like you know what the hell you're doing and you've got your vendors, vendors with you talking about what your vendors does. So it's not you doing all the work. Private money lenders are a great way to do it. And right now there's a lot of people with money sitting out there on the sidelines not getting anything on their investment. They're losing money because they're not putting money to work. So it's a great time. All the negative Nancy's in the news and stuff like that are really helping us raise capital from private investors because they can put their money to work and have it doing something in a short term. Because you got to realize most people think of a mortgage as 30 years. If people are tied up into a CD or certificate of disappointment, it's a five year process. A lot of times annuities going to be at least seven years in a lot of cases. So with us buying a non performing note, working to get it re performing, get it back on time for 12 months, that's an 18 to 24 month time frame and then selling it off easier later on That's a short term, all right. Or if we buy the note and we go to foreclosure and if it takes us a year, year and a half to foreclose, it's still short term in the eyes of their long term investment. And depending on where that money's at, they're usually not getting the monthly returns or the monthly payments on an interest paid to them. It's either going back into the face amount of the note or it's going back in their IRA that they can't touch legally. So that's kind of the difference between hard money loans or conventional loans is the most difficult to get. Most banks will only do up to 10, 10 mortgages for one investor. If you're doing LLCs and stuff like that, it's a little harder to get. But you have to build a relationship in smaller regional banks have a better relationship status than your bigger banks when it comes to that kind of stuff. Conventional hard money lenders, pretty easy. Does the project make sense. 65, 70 cents on the dollar. You may need to have a few months of reserves or interest payments in the bank so it shows that you can make those payments. If you're going through a process, they're going to want to know your repair estimates, your experience. And the fact that you're buying it, you know, at a 65 city cents of the dollar is a beautiful thing. They may finance 100% of your purchase, even a part of your rehab costs if you're buying it cheap enough. And then conventional financing. Here's another thing. Conventional financing is not going to finance then after repair value on a flip property for you. Most of the time they're going to want to have you hold that property, especially if it's been a foreclosure, take it back repair. They want you to hold on to it for at least 90 days to give you a value on it. They're not usually going to approve a flip value within 90 days. They're going to get off the purchase price. That's if you're buying the property, buying the REO at the foreclosure auction and stuff like that. Okay. If you're buying at foreclosure auctions, you would use either hard money lenders or private money lender. You're not going to get conventional financing for property. Also if you've got a borrower out there who is behind and say they're going to refinance yet, they're going to be either, either using their own money. Private investors, maybe a hard money lender if it's not under occupied. But they're sure as hell not going to go to the bank and get a conventional loan, especially if they've been late anytime in the last 24 months. More than two late pays on a mortgage in 24 months you're not getting a traditional or commercial mortgage of any sort. Not till those late pays fall off your 24 month history. So that's the difference between conventional hard private money. If you can buy terms or get some RW terms, that's a whole different animal. But most of us, most of us, we get lazy. We focus on hard money lenders because we come from the fix and flip or the real estate side of things and we hope to get conventional. Most of us are using conventional for our primary residence and homestead. And if you've got some subpar credit, you can still get a pretty decent loan. With the FHA loan, first time home buyers stuff can usually do that. But when it comes to holding real estate long terms, hey, you definitely want to develop your private money investors list and then use that to help you be more flexible on the financing so you make sure that your property's cash flow the most. Otherwise hard money lenders will eat up your profit and the last thing you want to do is do a skinny deal. So go out, take some action everybody and we look forward to seeing the top. If any other questions when it comes to lending or money cost, stuff like that or the note business, feel free to reach out to me. Book a phone call@talkwithscottcarson.com that's Talk with Scott Carson.com and like I said, we'll see at the top. Sam.