You are flying high after attending a seminar on real estate investing. The presenter convinced you that you can begin investing today with no money of your own. One way to do that is to find a hard money lender willing to finance your first property with no money down. Good luck with that.
Obtaining hard money loans with no down payment isn’t completely impossible, but it is nearly so. According to Actium Partners, a Salt Lake City, UT hard money loan agency, lenders willing to fund projects with no money down are few and far between. They are the rare exception to the rule.
Based on that understanding, here’s the skinny on hard money loans with no down payment:
High Rates and Fees
To begin with, expect any lender who does not require a down payment to charge exorbitantly high interest rates and excessive fees. The lender has no choice. Agreeing to fund 100% of a borrower’s needs is terribly risky for the lender. Simply put, the lender is assuming all the risk while the borrower assumes none. A borrower has to pay for that privilege – and pay dearly.
This is no joke when you consider that hard money loans, on average, start with higher interest rates anyway. If you are looking at 10% interest with 50% down, you might be looking at double that rate with no money down. Are you willing to pay high rates and fees just to escape a down payment?
Funding an Undervalued Property
You might choose to deal with a hard money lender who doesn’t normally fund at 100% but is willing to make an exception in your case. Ask yourself why that is. Is there something about your personality that makes you inherently trustworthy and instantly lovable? Probably not. Something else is likely in play.
One possibility is that the property you are attempting to acquire has been severely undervalued. If a lender suspects you don’t know this, they could see a lot of potential in that property – even if you default. That being the case, the lender is less worried about default because there is still money to be made in repossessing and selling the property.
This is not to suggest that hard money lenders are predatory lenders hoping their clients default. That’s not the case. But in the instance of a severely undervalued asset, there are advantages to funding at 100%. The lender gets to charge a higher rate and, if the borrower does default, still turn the transaction into a windfall.
Funding Future Market Predictions
There is yet another reason a hard money lender might be willing to make an exception to fund your first property at 100%: future market predictions. For example, you might be considering investing in retail office space. You are new at the whole real estate thing, so you don’t know what to expect from that property five years down the road. But maybe your lender does.
Perhaps the lender sees the value of the property doubling or tripling a few years from now. It might be worth funding at 100% because, even if you don’t pay, the potential profits outweigh whatever risk the lender faces.
All of this is to say that lenders do not offer hard money loans with no money down unless they stand to benefit from doing so. Lenders look out for their own interests, as they should. If you are able to secure a loan with no down payment, it is going to cost you one way or another. Make sure you are willing to pay the price.