How to Make Hard Money Financing Work- for Landlords

I love buying foreclosures with cash. Nothing beats the flexibility and certainty.  But financing can also be an incredible leverage tool.

With flipping, borrowing usually works well.  Buy, fix and flip quickly, and you earn easy profits, even with the high costs of a hard money loan.

But what about the buy-and-hold investor?  The landlord looking for steady income?  Should leverage ever be a part of the equation?

I used to think that it was a really bad idea to borrow for buy-and-hold.  But I’ve changed my mind.

When you run the numbers…actually do the math… financing makes a lot of sense for income producing property.  The leverage REALLY helps the returns.

Now… where do you get a loan?  Credit today is tighter than hipster jeans.  And even if you qualify for investor financing, Fannie Mae caps the number of properties you can finance as an investor.

So, for most investors, the only real financing option is hard money or private financing.

That’s usually 12% money (or higher).  So how can you possibly make money on a rental if you are paying loan-shark rates?

Well… the math is actually pretty simple. Hard money works.

It turns out you can STILL make money on your buy-and-hold properties, even if you are borrowing 12% money…actually, you make MORE money than if you paid all cash.

SIDE NOTE: This is GREAT for people with Self Directed IRAs.  You can buy rental properties with leverage.  While banks won’t give you the “non-recourse” loan the IRS requires, a hard money lender is usually happy to lend based on the value of the property– with a large down payment.  And again, the math gives you a much better return on investment.

Now, first you have to accept the difference between Return on Investment (ROI) and Cash Flow.

Because with hard money, you are really going to dent your monthly Cash Flow… but you are going to increase your overall ROI.   This just means you have to look at the long term, not the short term.  Of course, since most buy-and-hold strategies are designed to look at the long term anyway….

In Florida, I can readily find hard money at 12% interest.  Usually, that’s a 50% LTV Hard Money(Loan to Value)… I have to make a 50% down payment, and can borrow the other half.  The hard money lender wants a short amortization schedule… full repayment of all principal and interest in 100 months.  (Or they want a short term balloon, which requires a refinance in a couple years… not a great long term plan.)

Again, 12% sounds like an exorbitant rate and results in a really high monthly payment, right?

So… how can the hard money loan POSSIBLY be better than all cash?

Here’s the simple math:

$100,000 Property
$1,200 Monthly Rent

  • Assume 4-months of rent to pay property manager, taxes, insurance, vacancy and other expenses. (Conservative, but simple). 
  • Ignore depreciation, cost allocation, and other tools that actually make financing even more attractive.
  • Ignore the possibility that rent and property values should go up over time- that’s common to both calculations.

Cash Return on $100k property rented at $1,200/month:
$1,200/month x 8-months = $9,600 / $100,000 invested = 9.6%

Cash Return using 100 month / 12% interest / 50% down payment:
$50,000 Loan: 100-month amortization=$793.29 per month ($9,520 per year)
$1,200/month x 8-mos. = $9,600 – $9,520 loan = $80.00 / $50,000.00 = .0016% 

Ugh… which would you prefer?  A 9.6% return… or a tenth of a percent?

Hold on a minute. 

So far, we just calculated your cash flow as a percentage of the amount invested.  It’s not an accurate picture of your overall ROI.

Because every month, your tenant is helping you pay off the hard money lender. 

On a 100 month amortization, a huge chunk of the monthly payment is reducing the loan principal.  And that reduction is adding to your equity value (independent of any appreciation in rents or the property value).  Here’s what your $50k loan looks like over time:

For the mathematically challenged, this looks like a bunch of gobbledygook.

What it shows is the investor who borrowed hard money (even at an outrageous 12%) makes a little less ROI in the first three years than his “all cash” counterpart.

But then in the 4th year, the return for the leveraged investor passes the All Cash investor… and it steadily gets better.

Over the course of 8 years, all other factors being equal, the Investor with a hard money loan made an average of 11.72%, while the cash investor made a steady 9.6% return.

That means the leveraged investor had a 22% better ROI than his all cash counterpart.


The REAL difference is what happens at the end of the loan.

Because the leveraged investor could afford TWO houses with his 100k (two $50k loans with $50 down payments).

So after 8 years, the leveraged investor has two houses, both paying rent, both with fully paid off loans.

And the ROI for the leveraged investor is thereafter DOUBLE that of the cash investor.

Let’s Summarize your choices:

1.  An all cash purchase of a rental home.  Pay $100k, rent it for $1,200 a month, and make a steady 9.6% return on investment after paying all property management, taxes, insurance and maintenance bills.  (Plus the rents and property value hopefully go up over time)


2. Borrow 50% hard money at 12%.  Buy two houses.  Enjoy an average of 22% higher ROI over the first 8 years…. then 100% higher ROI than under the cash option (and still enjoy appreciating rents or property values)

The Moral of the Story?

Even leverage at loan-shark rates can compound the returns for long term, buy-and-hold foreclosure investors!!


The 9 Ways to Finance Your Foreclosure Purchase

Buying a foreclosure property at the auction?

You better have the money lined up ahead of time.Dollar Bill

Cash is king at the foreclosure auction.  In some states you have a day or two to pay for the property, while in others the auctioneer won’t even gavel the property sold until certified funds are tendered.  Generally you have to be prepared to pay your entire bid amount right away.

Most other creative real estate investing strategies focus on how to buy or control a property with low or no money down.  That just doesn’t work with foreclosures — at least not at the auction stage.  You might find a pre-foreclosure or REO strategy that lets you get by without cash…. but not a foreclosure auction.

Here is a summary of the most common ways to pay for a foreclosure property.

1.  Cash

Well, that’s obvious, right?  If you have cash in hand (or in a checking account), you don’t need to look further.  Get a cashiers’ check from your bank.  Pay for your property.

Just make sure your bank account is available as cash.  Your CD or money market account might have penalties for withdrawals.  Your “cash management” brokerage account might take longer to liquidate than you think.  Find out in advance how long it will take to get those accounts turned into cash or certified funds.

Obviously, you need to have some idea how much money to bring to the sale.  Will you be making a 5% down payment… or do you have to pay the entire bid amount?  And you need to know the form of payment accepted– cash, cashier’s check, attorney trust account check, money order, etc.  Very few auctions accept a personal check…

If the auction just requires a deposit, most investors will bring a variety of small cashier’s checks and some cash.  So if you are looking to buy a $100,000 house and the rules require a 5% deposit check, you might bring a $5,000 cashier’s check… and a little cash in case you get caught up in the bidding.

2.  Retirement or Insurance

Most people don’t know their IRA can invest in real estate… as long as you have your account with a custodian that permits you to “self-direct” your investments.  With a SD-IRA, you can buy foreclosures, although the timing of getting your cash to the auction can be tricky.  You need to be prepared in advance.  Usually you will need to make arrangements to wire money from the custodian to an attorney or escrow agent (since giving you the money directly is not allowed).

Permanent life insurance (think whole life here… not term) also has cash value that can be borrowed quickly and inexpensively.  But again, you need to talk to your insurance agent ahead of time to know you will have the cash in time for the auction, and how the repayment of the “policy loan” works.

3.  Bank Loan or Line of Credit

Forget about traditional home loans and mortgage brokers.  Banks won’t lend without collateral, and they are not going to cut a check for a foreclosure property you don’t yet own.  They can’t put a mortgage on the property until redemption and objection periods expire. So these lenders won’t lend money when you are looking to buy at a foreclosure auction.

But with good credit and collateral, you might be able to obtain a personal line of credit or a loan secured by some other valuable collateral (your home, business assets, etc).  Small local banks and credit unions are your best option here.  These are easy-to-access loans, with minimal paperwork.  And you usually incur no costs until you use the money on the line of credit.

Most investors have a substantial line of credit as a security blanket, even if they don’t need the money as a funding source.  Just in case.

4.  Credit Cards

Credit cards?  Really? Do you really want to borrow on credit cards?

Actually, if you have a low, introductory interest rate, a low-cost cash advance option, AND a great investment opportunity, credit cards might just work.  But do the math first.  Make SURE the investment warrants the high cost of borrowing on plastic.  For most investors, this would be the last resort.

But every experienced investor has run across somebody who made their first deal work on credit cards.  At a foreclosure auction, it is unlikely they take credit cards as payment, so you will need to make arrangements to get a cash advance or have checks to cash at a local bank against the credit account.

Credit Cards

5.  Friends and Family

For many people, the LAST place they would ever look for money would be friends or family.  It’s embarrassing to ask, you don’t want to owe any favors, and you just know they are going to try and talk you out of this whole idea.

For others, friends and family seem like an obvious source of funds.  But be careful.  Even if they believe in you enough to lend or partner with you in exchange for a cut of the profits or a nice interest rate, is it worth the risk?  Do you want to be reminded of “Johnny’s Stupid Idea” every Thanksgiving for the next 20 years, if things don’t go exactly as planned?

But definitely ask them. Friends and Family are almost always going to try to shoot you down and  explain why your plan won’t work.  But that’s a good test of how well you can articulate your plan.  If you can convince them … you might be ready to start investing.  On the other hand, they might convince you that you have no business doing it.  Which also might not be so bad either.  If you can’t convince friends and family, maybe you just aren’t ready…

6.  Partnerships

Years ago a realtor told me “partnerships are sinking ships”.  Wisdom to live by.

The problem with partnerships is that very few partnerships start with a clear, mutual understanding of exactly what everybody is expecting out of the partnership.  This can lead to huge problems.  That’s why EVERY partnership should be reduced to writing.  Anticipate the problems before they come up to keep everybody happy.  It’s a lot of work… and a bit of a buzzkill… to think through all the negative things that might happen, but it will never be easier to address these issues than right before you start.

Most foreclosure partnerships involve one partner putting up the money and the other partner doing all the work, with a split of profits at the end.  But every partnership is different.

As you get more experienced, you can put together a syndicate with many partners to increase investment opportunities and share the risk.  But you don’t want to start raising money this way without solid legal advice.

While we use “partnership” as short-hand for people teaming up, realize that a General Partnership has its own legal status, and partners become liable for the debts of the other partners.  So a lawyer would usually recommend the “partners” use a different form such as an LLC, Corporation or Limited Partnership. All have the same basic idea– some people put up money to make a passive return, while others do the work.

7. Investors

Also called “private money lenders” in some circles, investors are simply individuals with money to lend.  Look for the “money to lend” ad in the classifieds or on Craig’s List and you’ve found an investor.

Unlike partners, investors are looking for a specific return, not a cut of the profits.  Some only lend with outside collateral, such as your home.  Others lend based on their opinion of your experience and ability. Expect high interest rates and short term repayment schedules.  Plan on pitching an investor the way you would a commercial loan officer at your bank: explain your plan, articulate your expectations and generally sound like you know what you are doing.

8. Hard Money Lenders

Hard Money Lenders are easy to confuse with Investors.  A Hard Money Lender is generally an individual making short term, high interest loans to people who can’t borrow the money they need from a bank.  The difference is that Hard Money Lenders are generally more interested in the collateral than the borrower or the profitability of the deal.  They will only lend if they think what you are buying at the foreclosure sale is worth a lot more than you are paying for it.

Hard money is expensive, but it can work great with foreclosures you intend to flip.  The loans are approved immediately with no red tape, and the lender doesn’t care that the property needs to be rehabbed.  But hard money generally is repaid in six months to a year, so it limits your exit strategies– you don’t want to buy and hold with hard money.

Hard Money

9. Wholesale Flipping

Most people understand flipping.  You buy, rehab and sell.  But Wholesale Flipping lets you make money without ever actually owning the property.  Just as you can assign a contract for cash in a normal real estate deal, you can assign your purchase rights at the foreclosure sale to another investor who wants to do the rehab and sell the property to the end buyer.

As a wholesaler, you do all the legwork, inspections and bidding… then you get a preset fee for assigning the deal.  You make a lot less than you otherwise would if you handled the entire deal, but you don’t have the same risk and work as the rehabber will.  Good wholesalers have a list of qualified buyers lined up before they bid on the foreclosure auction…. or they end up walking from the deposit.


So now you know how to raise money to buy at the foreclosure auction… which method are you going to use… and are you ready to start?