Why Robert Kiyosuki may think real estate hard money loans worthwhile – as long as you can afford it
Hard money lenders loan funds when the borrower wishes to invest or flip property and is rejected by the bank due to shifty credit or disreputable credit history. The borrower then has the option of appealing to a private lender who may agree to fund these real estate hard money loans on condition that the lender has promising collateral that would more than double repay the yield put into it.
The investor profits by higher prepayments and higher interest (8-15%). He also includes other clauses such as points (essentially compensation to the private money lender for originating the loan), referral fees, underwriting, processing, document preparation or other fees and interim fees such as amortization and taxes and insurance to haul in more profit. Add to that renewals for private money loans and ‘late fees’ and hard money costs go through the roof.
Hard money lending is a risky venture. The borrower has to keep to the dot of the promissory note otherwise he risks foreclosure. Lenders of private money tend to foreclose faster than banks since they risking their own money and that of their investors. It is therefore crucial that borrowers repay on time and according to covenant terms otherwise the investor can summarily wind up and foreclose. The lender too can foreclose if he suspects that the borrower is failing to maintain the property. Many lenders summarily foreclose if they determine that borrower’s financial condition has deteriorated and no longer meets the covenants set forth in the original loan documents. Investors in private money are not after your property. They want the fees and interest and have a fiduciary duty to protect their private investors’ collateral which is why they will feel obliged to act – and they will act quickly – in recouping your property.
In short, getting a hard money loan may seem like a dream but may end up resembling a nightmare unless as Brandon Turner, senior editor of the real estate company BigPockets.com puts it “you have a clear exit strategy on a flip and secondary funding available as a backup.” It goes without saying that you also need to enter with the clear means of being able to repay.
For this reason, Turner discourages investors (with exceptions) from using hard money. He believes that the risk is too great. A worst case scenario for him would be using hard money to make a flip and being unable to sell that house before his term is up. Turner would lose his house to his lender.
Other experts agree with him. Rich Dad Education real estate blog recommends hard money loans as a short term – very short term – solution if at all. (Although the blog considers hard money loans profitable in certain instances that include providing rehab loans where repairing cost is folded into purchase fund; faster turn around; and possible 100% ARV financing depending on the lender). Some critics go further and dissuade prospective borrowers from considering them altogether. The Wall Street Journal in 2011, for instance, quoted some critics who compared hard-money lenders to predatory subprime lenders, lightly regulated operations that cater to people desperate for money and strongly dissuaded borrowers from investing in any such risky ventures. Security is primary for many individuals. They’d rather stay put than invest and possibly lose their money (and in the case of hard money their collateral too).
Robert Kiyosaki, the author of the famous 2000 book ‘Rich Dad Poor Dad” thinks otherwise. Kiyosaki advocates the importance of financial independence and building wealth through investing, real estate investing, starting and owning businesses, as well as increasing one’s financial intelligence to improve one’s business and financial aptitude. In an interview with Business Insider in 2015 Kiyosaki mentioned that cash-flowing assets are a more reliable source of wealth than cash income and far more permanent. He said:
That’s how we get (and keep) our money working for us — instead of working hard for money (i.e. a paycheck) all our lives. …. We continue to remind ourselves that “cashflow is king” and that assets are the foundation for creating true financial freedom.
Assets include factors like stocks, bonds, and intellectual property. Real estate property falls smack into the system – as long as they bring money into your pocket. Liabilities include mortgages, consumer loans, and credit cards.
Kiyosaki told readers that if you wanted to build your wealth it was essential to distinguish between the two. Now, Kiyosaki did not discuss real estate hard money loans. But hard money loans are a route to investing and may be the only way to accomplish the borrower’s dream – particularly if he is shunned by the bank. Hard money loans could end into the sort of liabilities that Kiyosaki urges individuals to avoid. They could simply keep on sucking money out of your pocket. A wise venture, on the other hand, could result in a property that brings money into your pocket. For Kiyosaki, any route that leads to an investment that produces positive cash flow income is considered to be an asset. Hard money can be a great way to get into the “flipping” business if you are looking for an investment the Kiyosaki way. However, experts such as Turner recommend that you weigh the risks with the reward to decide if this is a path you want to travel.
In short, real estate hard money loans could eventuate into some plum investments that wealth experts such as Kiyosaki would approve. They may also spin into liabilities that wealth experts such as Kiyosaki would urge you to beware of. Hard money loans are risky. Many tell you to keep away from them. Others say they may be helpful: assess them warily and enter them – if at all – for short-term purposes. Liability or profit – it’s up to you.