Tailwind Talks
Tailwind Talks is a podcast for high-performing professionals who want to build serious real estate portfolios without leaving their careers. Hosted by an airline and military pilot turned investor, it dives into actionable strategies for scaling your real estate portfolio while balancing the demands of a full-time job.
Tailwind Talks
Can You Really Buy Real Estate With No Money? The Truth About Hard Money
Diving deep into the world of high-leverage real estate investing, this candid exploration of hard money lending reveals both its immense potential and serious pitfalls. Drawing from personal experience—including costly mistakes—I break down exactly how these loans work and when they make sense for investors at different stages.
Hard money loans offer a unique advantage: lightning-fast closing capabilities that can help secure deeply discounted properties when sellers need to move quickly. With closings possible in days rather than months, investors can access deals others simply can't. However, this convenience comes at a significant cost—typically 4% funding fees and 14-15% interest rates on short-term loans ending with balloon payments.
The true danger lies in what happens when that balloon payment comes due. Without proper planning, investors can find themselves trapped in cycles of loan extensions, each requiring additional funding fees while interest payments continue draining resources. I share a personal cautionary tale of extending a hard money loan three times on a property requiring unexpected basement repairs, resulting in thousands of dollars wasted.
For experienced investors with solid plans, hard money can be transformative. The ideal scenarios include: securing significantly discounted properties through quick closings; implementing short-term renovation strategies with sufficient equity growth to refinance; or acquiring properties with cash flow strong enough to cover the high-interest payments. In each case, having a clear exit strategy before securing the loan is absolutely critical.
New investors should approach high leverage with extreme caution. Without experience estimating renovation costs, managing tenant issues, or navigating refinancing processes, the margins for error become dangerously thin. Even small unexpected expenses can eliminate profit margins entirely. Begin conversations with conventional lenders before closing with hard money, and remember that refinancing typically requires at least 45 days.
Whether you're considering your first investment property or looking to scale your portfolio, understanding when and how to use leverage appropriately can mean the difference between accelerating your wealth-building journey and derailing it completely. The power of hard money isn't in the quick access to capital—it's in knowing exactly how to use that capital with a well-defined plan for getting out.
What's up everybody. My name is Colm, a part-time real estate investor, full-time legacy airline pilot and a part-time military instructor pilot. Today I'm going to talk about what I think is a pretty powerful tool starting out, and that is high leverage. It sounds scary. It sounds crazy. I don't always use it, but I have used it a couple times and this is something that can help you jumpstart your career if it's used correctly. If you use it incorrectly, you're going to be sad and you may not be able to afford the internet, so you won't be watching this video much longer anyways. So this is what it looks like.
Speaker 1:The reason to use a short term debt solution like hard money, and hard money would basically just be you're going to a private lender. A private lender could be a family. It could be somebody that pulled together money with investors. There's a lot of different ways that they come together, but there's these people out here that literally just hand out money, give out money as an investment to you so you can buy a property without you going through the normal underwriting. So this would eliminate the need for an inspection, an appraisal, all the things that you would normally need the 45-day-ish closing window that you would need to get a property sold. This would eliminate all of that. Some places can close in as little as a couple days days. I've heard of some that are like overnight, the next day they could close on a property. So speed, that's one of the reasons that you would use this. Speed is important in real estate. Sometimes it's what gets you a deal or loses you a deal.
Speaker 1:The way that would look like it, the way that would work, is you would go find a property, find a deal. Let's say they say, hey, we really wanted $130,000 for this, but this guy is coming up on some situations in his personal finances. He needs to get rid of this property in two weeks. If you can close in two weeks, we'll cut you a deal. We'll give you it for $110,000. You'll say, okay, I would love to do that, but I don't have $110,000. And for me, I never had that kind of money laying around really. You look at that and you say, okay, I really want to get this property. What do I have to do? And what you would end up doing if you don't have the money yourself, is you would go find somebody that will fund it for you, and a hard money lender would be that person. So usually you'll take the details of the deal to them. It'll be the address, the square footage, the rents if there are any rents the expected repairs if you're planning on doing repairs to the property, et cetera. You would go to them, you would show them all this.
Speaker 1:They would either agree or disagree to it. In this case, let's say they agree to it and they end up funding the deal. A lot of the places will do like a 90% loan to value or 100%. You won't bring any money down as far as the down payment goes. They'll fund the entire thing and what you'll bring to the table for closing is paying the funding fee. So if they agree that they want to help you fund this property or this project, they're going to make you pay a funding fee and the funding fee generally is a percentage of the purchase price. So in this case you would look at it and you would say, okay, it's $110,000. Let's say they want 4% as the funding fee, which is not uncommon. Sometimes it's more, sometimes it's less than that. They want 4%. So it's going to be a little over $4,000 would be the total you bring that to closing, minus some credits that you will get for whatever taxes and sewer and maybe rent, if there's rents being paid, and you'll get a credit for that. Whatever, the difference is what you'll bring to closing Now that you have the property secured.
Speaker 1:Oftentimes the term is about six months. They're going to give you a six month term and then during that period of time, every month, you're going to pay interest only payments. So you're not going to be paying any principal down, it's just interest. Usually the interest rate is 14, 15% right now is what you're going to pay. So on this, you'd probably be paying 1500 bucks a month a little over 1500 bucks a month, but roughly that much and they're going to collect those payments for six months. And then at the end of the six-month term, you're going to have what's called a balloon payment.
Speaker 1:When that balloon payment comes due, they're going to say, okay, hey, man, six months is up, you owe us $110,000. And you're going to say I didn't really think about this part. I don't have $110,000. What do I do now? And they say, okay, no worries, we've got your back. We're let you stay on this for another six months. All you have to do is pay us another funding fee and keep paying us the interest-only payments. So now you can see what happens here. If you don't prepare properly, those six months are going to come and go a lot faster than you expect. You're going to come to the balloon payment. They're going to expect another $4,400 to extend your loan another six months and now you're paying another six months worth of interest-only payments. So by the end of it you paid almost $10,000, $8,800 in funding fees. Plus you paid 12 months worth of interest-only payments and you can see how this can kill a deal really fast.
Speaker 1:So if you don't know what the hell you're doing when you start, stay the hell away from these programs, because they're looking out for you, they're trying to help you out and this and that, but in reality it's just going to screw you. So you need to stay away from those until you really know what you're doing and you have a plan. If you don't have a plan going in, you're going to get screwed. And ask me how I know. I've done it to myself. I literally ended up doing this three times on one deal and it needed $40,000 worth of basement repairs. I totally messed up the deal. It ate up a ton of money. I profusely apologized to my partners in that deal. I messed it up. Thankfully we had a bunch of properties to offset my stupid mistake there.
Speaker 1:But if you're starting out, you don't have a lot of properties to make up for that and you might be getting screwed. You're not going to be able to afford to weather that storm and this might be your first and only deal right, and then you're going to have a bad outlook on the real estate market because your first deal didn't go well. Be very careful but that is one of the use cases is you need money quickly to get a deal secured. A lot of times that's how good deals happen is hey, I need to close in two weeks. If you can do that, we'll strike a deal for X price. The next one would be if you have a short-term equity growth plan.
Speaker 1:So if you're looking at a property, simply put a property is worth not a lot because it's bad shape. You take this hard money to get you to the finish line, close the deal and you're going to fix it up in six months and it's gonna be worth more by the end of that period. And if that's the case, then it's going to be okay Because, let's say, you bought it for 100, it's worth 200, you put 25, 30 grand into it, there's a spread there, right? So you can take that to a bank and you're going to be okay. The thing to be careful with on this one, though, is if 30 grand into it right, so you say, okay, there's a $70,000 spread, I should be good to go.
Speaker 1:But be very careful, because when you take this to a bank, they're going to say, okay, yeah, we're willing to fund this, we're willing to take this on and take it off hard money, but we want to do it at 75 or 80% loan to value. That would mean that, basically, the loan size is only going to be 80% of the overall value, so if it appraises for 200 on the dot, let's say they're going to do 80% loan to value, they're only going to give you a loan for 160. So, when you start doing the math on this, a lot of times people are including the entire number, right 100 to 200. But in most cases, they're not going to give you 100% loan to value. They're not going to give you every single penny that you want, and there are some caveats that maybe in a VA loan situation things like that, but for the most part, it's not going to happen.
Speaker 1:So what you need to budget for is the fact that you bought it for 100. In this just random example, you put 30 into it and the most you're going to get out from the bank is 160 minus closing fees and all these things. So the spread that you're going to make is actually pretty limited. The way that you get around that, of course, is if you sold the property or did something else with it. But if you're just looking at refinancing it into a bank or a credit union long term, a lot of people look at it like okay, it was worth 100 when I bought it. I fixed it up. Now it's worth 200. I'm going to get a loan for 200, but you're oftentimes not going to and I can almost say with certainty that you're not going to. If you're working with the majority of banks out there, build that into your numbers, because there is going to be a buffer that they're going to want to maintain that you don't have with hard money. So if you now, in another example, let's say you buy it for a hundred, you put 30 into it and it's worth 150. You can already see the math isn't going to work out. You're not going to get your money back out of it because it needs to be 75, 80% loan to value off of the 150 number. So you take 80% or 75% of that number and then minus what you put into it. You're going to end up upside down basically.
Speaker 1:So there's a lot of things that can get intricate when you're working with the hard money stuff. It's a great tool, but you need to have a good enough deal that makes it worth it. Otherwise you're just going to be spinning your wheels, you're going to be spending a ton of money on interest and all these payments to everybody and it's going to be death by a thousand cuts. One of the other use cases I would have for these type of programs is if you have cash flow that can support it. If you're buying something that's undervalued enough or has a high enough cash flow that you can eat all these costs associated with hard money and come out the other side okay, then it's really not a big deal because you're not paying it anyways. So oftentimes you're not going to use hard money for something like this.
Speaker 1:But maybe you found a deal that cash flows well, it's performing well as a property, but it needs to close quickly, like our first example. This might be a reason to use hard money, but it also has the cash flow to support it and in that case I'm not against it at all, because it's not your money anyways. It's really the tenant's money that's paying for it. But as a general rule, you really have to have a great deal for it to make sense. Timelines being compressed sometimes can be people trying to force you to make a bad deal. It works both ways. It can sometimes mean that you're going to get a great deal if you can close in two weeks, but it could also be people trying to force your hand and force you to make a decision when you don't have all the information, and that is a dangerous game to play, especially when starting out.
Speaker 1:Like I said, if you do that on your 101st deal and you have 100 doors, you're going to be okay. More than likely, if it goes bad, you're going to be okay. If you do this on your first or second or third or fourth deal, it's really going to be tough to recover from that, because you're in a situation where you just don't have enough income and enough equity to offset losses along the way, and they're going to happen. No matter how smart you are, no matter how great you think you are, you're going to make mistakes. Everybody makes mistakes. There's no perfect game out there. So just keep that in mind and, like I said, the biggest thing I would say to keep in mind is what is this going to be worth afterwards? And then subtract 20, 25% off the top, so that way you can make sure that you have a buffer there to go get on with a long-term loan solution, which would be with a credit union, with a bank of some sort. A lot of my loans are five-year adjustable rate mortgages, so it's a five-year term. At the end of the five-year term, it's a balloon payment and long before that ever happens, you're already refinancing it into a new loan. So things to think about there.
Speaker 1:For sure, if you have no experience and no reserve money which is why a lot of people use hard money that's the sad reality of this whole thing is, a lot of people use hard money because they have no money to put into their own deal, and if you're doing that, you're playing a very risky game because if you have anything unexpected happen throughout the course of this deal, you could easily put yourself out of business and have no recourse. Now you're gonna lose the property, you're gonna lose your credibility. You're gonna impact your own finances personally if you don't perform on this loan. So you're taking a lot of risks that may not be worth it. If your plan is that you're gonna fix this house up, it's gonna take you six months and you might make five grand off of it. The margins might be so thin that it doesn't make sense for you to do it. Be very careful with that because you upside down, without even thinking about it, to add or subtract $5,000 in the course of a renovation is not very hard to do.
Speaker 1:Anybody that's done it and that's watching right now totally understands what I'm saying. You can easily end up spending that much money. So you really need to look at a deal and make sure you have an appropriate margin and maybe get some experience. Maybe go work for a house flipper, maybe go work with somebody in the industry so you can understand what those costs actually look like, because it's one thing to just kind of look around and say, okay, yeah, I think I know what this costs to fix this place up, but it's another thing when you actually get in there and you're cutting checks for everything that has to get done.
Speaker 1:If you're buying something with negative cash flow or no cash flow maybe, then there's no tenants in there non-paying tenants. I've used card money for many deals like that. When you're doing plan thankfully I have a management company that is on top of it they can get things squared away in a matter of maybe 45 to 60 days. I already baked that into the whole plan, so I know that's going to happen. Hopefully they can level with the tenants and get them paying again and get things squared away. But if they can't, I'm already prepared for the fact that I'm not going to get any money out of these properties. Thankfully I have other properties to offset them now.
Speaker 1:But even starting out that's why I didn't deal with these kinds of deals because there's so much uncertainty involved with it. How long is it going to take to go through the court system? Are the tenants going to be cooperative at all? Are they going to destroy the units when they leave? These are all things that are real. These are things that happen to people every day.
Speaker 1:And if you've never done it before and you're buying a deal that's got some sort of complex situation with the tenants and you're going to use hard money to do it. You're, and now you have to deal with that. And if you've never dealt with that or you don't have a team in place that knows how to deal with that, you can really screw yourself fast. And then you're gonna be starting all over again and I think it'd be best to wait for a better deal than to just's just. It really depends on the type of person you are, the type of money that you have. If you have a full-time job, if you don't, if you have some sort of source of income to help support this, then it might be possible. But if you don't have any money, you don't have a job. There's a lot of things you need to square away before you start doing this stuff, because it's high leverage, which generally means high risk.
Speaker 1:The last kind of negative I would look out for is market softness. If you're buying in a time of year where the market's off for me specifically, it's like late fall through early spring market's pretty soft because it's winter time. Nobody wants to move in winter, so if you're doing flip houses and things like that, I'd be a little careful about it. If it's long-term buy and hold type stuff, then maybe I wouldn't be as worried about the market. But market softness as a whole is something that I would want to pay attention to, because you don't want to get yourself into a high leverage deal when prices are plummeting down. Granted, it takes a lot of time for this stuff to play out, but you want everything in your favor, as much as you can control or as much as you can plan ahead for, so that way you can limit the downside risk. So I would just say to be very careful with that. If you see that the market's getting soft in your area, there's a lot of migration out of your area.
Speaker 1:Maybe stay away from hard money and stick to something that's more of a long-term solution, because if you're using long-term debt, you're going to have more eyes on the deal. You're going to have an appraiser come out there. There's going to be checks and balances, and I don't really. Appraisers are something that I think is BS anyways, but I'll talk about the idea is that you'll have more oversight on your deal than a hard money lender, which could literally just be somebody that you know that has money. There's no criteria that they have to meet. It's literally just somebody that has money that's willing to borrow it to you and you make some sort of agreement. So it doesn't have to be an institution, it can just literally be Joe down the street with $100,000 in his bank account. So be very careful with that because, joe, you might convince Joe that this is a great deal and he should give you the money and this and that, and suddenly you're both in over your heads, you're both upside down, nobody's happy and you just tarnished your reputation with somebody that could potentially lend to you in the future.
Speaker 1:Just recently I used a high leverage loan solution to get a duplex and a single family that I closed on last Friday. I used hard money to do that. I paid the funding fee. I did the whole deal. But the reason I did the whole deal, but the reason I did that is because I could close both these properties that were from the same seller in a matter of two weeks. I got a really good deal, I think, on the prices. We'll see if that turns out to be true. I could be totally wrong on that, but I think I got a pretty good deal.
Speaker 1:The reason that I went that direction was because they wanted to close quickly and I wanted to take both their properties. I wanted both of them to get the maximum deal between the two and also closing them quickly for this guy. Everyone walked away happy I've got the two properties I wanted. They got a bunch of money and I used hard money to do that, so I was willing to pay the funding fee.
Speaker 1:But even then, before I even closed this property, I've already been talking to lenders about where it's going to go for the long term, because I don't want to get to the end of the six months which is so easy to do and then wake up and be like, oh my God, I didn't set this up at all and I need 45 days to figure this out. So now I'm going to pay another funding fee and, like I said, you end up in this death spiral of just money flying out the window. So I've learned my lesson from the big mistake I made on that property, where I stayed three terms with the hard money lender. I learned my lesson there and I'm applying those lessons learned now, because it takes about 45 days to close a loan anyway. So you should really be looking at your long-term debt solution no later than probably four months into the loan, because you need about two months to try to get it all solidified, and that's assuming that everything is stable with the property.
Speaker 1:So all this to say, hard money lending can be a great solution. It can help you get your foot in the door on deals that you otherwise couldn't access. But it can also be something that can put you upside down before you know it and screw you and really delay your career before it even gets started. So be very careful when you're looking at it. If you've ever used hard money, if you're potentially looking at using hard money, throw something in the comments. I love interacting with people. I'll get back to you and give you my thoughts on it. Otherwise, I appreciate you guys watching this video. As with all the other ones, I'll talk to you guys soon, see ya.