Which questions should I ask when I speak with hard money lenders?

Estimated reading time: 6 minutes.

Question:

Post outline:

What are your real estate investment goals?
What are your loan priorities?
List of questions
Conclusion

What are your real estate investment goals?

Knowing which questions to ask when you speak with hard money lenders will, to a large extent, be determined by what your real estate investment goals are.

Let’s cover a few basic goals, and see how these goals might affect the questions that you would pose to a prospective hard money lender.

1. Increase liquidity/make money through fixing & flipping properties

Many real estate investors find the idea of flipping properties appealing because of the potential for a large influx of cash after the sale of the investment property. If you are looking to fix & flip properties in order to generate a return, then you will want to understand if the lender you are working with has a fix & flip product. Additionally, you’ll want to get a good understanding of the term length of the loan to make sure that it works with the timeline of your construction and eventual sale of the property.

In some cases, you may want to perform significant rehab on a property. If this is the case, you’ll want to make sure that you’re working with a hard money lender that allows for you to perform a significant rehab.

Although this underwriting guideline isn’t talked about often, some hard money lenders have restrictions on the ratio of the construction budget to the purchase price of an investment property. For these lenders, if your construction budget is too great relative to the purchase price of the investment property, they won’t make the loan.

Two other key variables that you’ll want to understand are cost and leverage. If you know that your fix & flip is going to be quick, then perhaps the interest rate and points are not of primary concern to you. However, if you are undertaking a more lengthy project, then you may be highly concerned with what interest rate and points a prospective hard money lender is able to offer you. With regards to leverage, you may be seeking to maximize it during a fix & flip and therefore put as little of your own money into the deal as possible. This would mean that you’d be looking for a lender who offers a high LTC (loan-to-cost) and high LTV (loan-to-value).

2. Build up a rental portfolio through the “BRRRR” strategy

The “BRRRR” strategy is commonly employed by real estate investors who are looking to build up a significant rental portfolio. The “BRRRR” strategy is attractive to real estate investors because when it is performed properly, it allows for a real estate investor to pull all of their cash out (and additional proceeds) and still retain and ultimately build equity in the investment property.

If you are speaking with a hard money lender about a “BRRRR”, then you are most likely doing so for the front-end of the strategy, or the “Buy” and “Rehab” portion of the “BRRRR” strategy. There are times when hard money lenders are used for the last part of the “BRRRR” strategy, the “Refinance”, but oftentimes that lender is a bank.

In any event, let’s suppose that you are looking for a hard money lender to finance the purchase and rehab of an investment property that you are looking to refinance and hold onto. In this case, you might be asking if the hard money lender has a bridge product that is appropriate. Oftentimes, the differences between a bridge loan and a fix & flip loan that a hard money lender offers are negligible, and in fact, a fix & flip loan is a type of bridge loan.

However, the key difference from the lender’s side is that your exit from the loan is a refinance as opposed to a sale. This means that the lender is going to be looking more carefully at variables that affect your ability to refinance the loan as opposed to sell the investment property.

You’ll still be looking at key loan considerations such as leverage and cost, but you may take a different perspective on leverage, and instead of seeking to maximize leverage, you may look to optimize leverage. This means taking on the right amount of debt instead of taking on the most debt you can (although sometimes these are the same values).

You’ll want to understand if the hard money lender has any prepayment penalties. Sometimes, these can come in the form of a minimum amount of interest paid. For example, a lender might require that you pay a minimum of 6 months of interest even if you are ready to pay off the loan before that 6 months has elapsed.

What are your loan priorities?

Depending not only on your investment strategy, but also your current situation, you may have different priorities than other real estate investors.

Are you strapped for cash?

Are you comfortable handling high leverage?

Do you need capital quickly, and are you willing to pay a premium for speed?

Do you want to focus on building a relationship with a local lender?

These are some of the questions that you may ask yourself to determine what your loan priorities are. For some real estate investors who are light on liquidity, their only option may be to maximize leverage. Some real estate investors are not comfortable taking on a maximum amount of debt, and as such high leverage is not as important to them. Some real estate investors need to be able to act on a deal quickly, and because their deal timeline is relatively short, they can justify a higher cost of capital. Meanwhile, other real estate investors are focused on cultivating a long-term relationship with a local lender that they can rely on for superior customer service and reliable loan closings.

Assessing your personal financial situation as well as what you are looking for with a loan can be helpful in preparing a list of questions for a hard money lender.

List of questions

Now that we’ve discussed the importance of determining your real estate investment goals/strategy and loan priorities, here is a list of sample questions that you can use when speaking with hard money lenders. Feel free to use parts of this list, or the entire thing.

Experience

How many comparable deals do I need to have completed?
Do you offer a lower cost of capital/increased leverage for investors with more experience?

Cost

What is your typical interest rate?
How many points do you typically charge?
What additional fees do you charge?
Do you charge interest on the full loan amount, or just funded amounts?
Do you charge a prepayment penalty?

Term/Leverage

What is your typical term length?
What is your typical LTC (loan-to-cost)?
What is your typical LTV (loan-to-value)?

The above list is not exhaustive, but it serves as a great starting point, and you can begin to get an apples-to-apples comparison of the hard money lenders that you speak with.

Conclusion

The questions that you ask a hard money lender will be informed in part by your real estate investment strategy, and also by your loan priorities.

However, there is quite a bit of overlap regardless of which real estate investment strategy you pursue, or which loan priorities you have.

You can use the list of 10 questions provided above as a starting point to get an idea of what a hard money lender can offer you.

Do you need financing for a current or upcoming real estate investment project?

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