For example, let’s say you’re buying a commercial building for $1MM that is valued at $2MM. You will need to bring in at a minimum 30% down towards the purchase, sometimes more depending on the lender. However, what if the property needs rehab? Not to mention all of the other expenses involved in getting a commercial property up and running. If you don’t have the cash to float it yourself you have 3 options in this market:
1. Go to a family member to get the cash
2. Bring in a partner
3. Go to a private lender or hard money lender to get the cash

Now in most cases, bringing in family to a business deal is not even an option.

The second option, bring in a partner, is viable but how much of your equity is this partner going to want for his/her cash contribution? Probably a lot more than their short term cash is really worth. Not to mention, you can’t just get rid of your partner once you pay him/her back their cash. Oh no, these people stick around like bugs on a light at night. Partners just don’t go away. You would probably end up giving this partner somewhere between 45-65% of the equity in that property, not to mention a cut of the cash flow once it starts producing. You aren’t going to get a partner in this deal that will accept a mere 8% per year!! You’re dreaming with this option.

Ok, now to option number three. Bring in a hard money lender. Now let’s say you got a “hard” money lender to give you a loan at 13% and 5 points. That’s only 13% APR. Again, that’s APR of ONLY THE CASH YOU BORROWED, nothing more. Now that 5 points, that’s going to be 5% of your equity in that building right out of the blocks. So let’s say worst case scenario you pay your hard money lender off in 2 years. And let’s say he loaned you $450,000 towards the purchase, rehab, and upkeep of your $2MM commercial building that you got for $1MM. After 2 years, you’ve paid this hard money lender only the interest on the $450K and 5% of the $450K which is a whopping $22,500. The best part is that your hard money lender is OUT of the deal. He gets no part of the cash flow and only a tiny bit of your entire equity in the deal. No strings attached. Shake hands and walk away. For a loan of $450K from a partner, you may as well kiss $500K of your $1MM in equity goodbye.

I think you need to do the numbers and reconsider your options. You will not be able to find a “private lender” in this market that will give you their cash that is in extremely high demand for 8% and no points. I can almost guarantee you that. Hard money lenders have a bad name but obviously, if you do the math and consider your options, its better than bringing a partner into the deal!!

As an investor the goal is to bypass the hard money lender by working directly with private money investors.

Some private money investors are happy with 8% and no points. Hard money is a scam by itself. HM lenders charges outrageous rates and points.

I never worked with a HM lender and never will.