It’s been years since the credit markets crashed so hard that honest working self-employed people can’t get the financing they need to leverage their business successes.  Many have gone out of business, others find private investors and pay a higher price for their money, and many are scammed out of the few dollars they have left in order to reach some secret “money source” that really doesn’t exist.

As a business person, I’m frustrated I can’t access funds to run my business.  Of course I do have the credit card with a $40,000 limit, but they charge 29.99% annually (yes I missed a payment by a day and that higher rate kicked in).  That rate is actually pretty cheap compared to the Hard Money Lenders I know.  I’ve seen rates as high as 10 points and 18% annually.  Then there are the private investors that want 20% return in 6 months.  Am I complaining?  Well, a little bit.  The reality is that I can still make money even using their high rates.  I’ve developed relationships where I can have access to money any time I need it with a few phone calls.  So given this credit crunch, I’m one of the more fortunate in this business.

Where is the Medium Money Lender?

I’ve had so many opportunities to hold on to real estate by turning my rehab into rental property AND cash flow at better than the 1 percent rule*, but the money wasn’t there.  Hard Money Lenders want to get in and out of a deal quickly so they aren’t vulnerable to another market crash.  Conventional financing isn’t an option for me and many others.  None of the underwriters will get fired by saying “no” to a loan application. So I had to sell these properties at a lower market price and move on to the next one.  In hind sight, had I been able to cash flow, I would have enjoyed the benefit of cash flow AND appreciation as many markets have rebounded quite nicely.

CrowdFunding

Many real estate investors were excited to see the legal passing of crowd-funding for real estate.  (See previous blog post on crowd-funding HERE.)  The big takeaway from my interview with a crowd funding CEO was that it would be the same as hard money for me, the lone real estate investor.  The points are the same and the interest rates are the same as hard money. *sigh*.  However it is attractive to the smaller accredited investor where they can invest a small amount of funds and reap the higher level interest rates enjoyed by Hard Money Lenders.

Now the world knows that the small investor can earn high interest rates, and they want nothing less.

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My weekly networking meeting in Austin continues to grow.  This last meeting there were no less than 4 Hard Money Lenders ready to lend on deals.  Their hands in their pockets ready to pull out the cash.  One would think, according to the model of supply and demand, that the significant supply of money in the room would create a competitive environment that would bring the interest rates down so that at least SOME of their funds would be put to work.

Some of the more innovative Hard Money Lenders, starting with The Norris Group in California, and now Streamline Funding in Texas, have created a hybrid model that starts with a standard hard money loan for a distressed property, then converts to a lower interest loan once the property is renovated, so the developer can add a tenant and cash flow for a longer term.  If you’re a Hard Money Lender and have too much money earning 0% interest, I encourage you to look into implementing similar financing models.

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Some day, those with too much cash will figure out it’s better to earn 6%-8% on their money than 0%.  For those ready to make that adjustment to their business model, feel free to reach out to me.