Understanding the basics of hard money lending represents the first step of breaking down real estate financing. Hard money loans are, after all, a real estate investor’s best friend; they are the quickest path to securing a deal. Nonetheless, hard money lending can get complicated quickly, so you need to realize what you are getting into before making any decisions for yourself.
First: What Exactly is Hard Money Lending?
Many investors looking for alternative financing that doesn’t involve their local bank may have heard the term “hard money.” They may have even asked themselves a simple follow-up question: what IS hard money lending?
Hard money lending is a short-term loan obtained from private investors or individuals, at terms that may be more strict than a traditional loan. Though the terms of this creative financing option may be more strict, this form of private financing for real estate generally has more lenient criteria.
When exploring real estate hard money lending, here are some of the questions you should think about: What are the pros and cons of such a strategy? When should you use private financing for real estate? Where can you find hard money lenders? The more you know about hard money, for that matter, the better. This guide should serve to lay a solid foundation for everything you need to know about one of today’s greatest sources of capital.
Hard Money Lending FAQs:
- What is the Big Picture of Hard Money Lending?
Hard money lending is another way an investor can finance their real estate projects outside of the traditional mortgage means. It is often used by investors who aim to improve or renovate a property and sell it. Given that you can usually get a loan in a matter of days (as opposed to weeks from banks), this is a fine choice for house flippers and real estate developers. This is also an option for investors who only need to do quick fixes to raise a property’s value, then secure another loan based on the new value to pay off the hard money lender.
Hard money lenders take a different approach: they lend based on collateral securing the loan, and they are less concerned about your ability to repay. If anything goes wrong and you can’t repay, hard money lenders plan to get their money back by taking the collateral and selling it. In this case, the value of the collateral is more important than your financial position.
- What is the Difference Between Hard Money Lending Vs. Other Lending Types?
The main difference between hard money lending and other types of loans is that this type of financing does not focus on your credit history or income as collateral. Instead, lenders will see the property’s value as the determining factor, emphasizing its after-repair value (ARV). ARV is the worth of the property once your renovations are done.
Other differences include:
- Hard money lenders do not invest in primary residences. Owner-occupied residential properties are subject to many rules and regulations, thereby increasing the risk for lenders.
- Hard money lenders do not sell loans to Freddie Mac or Fannie Mae. More often than not, lenders use their own money or raise it from a pool of investors. The amount they loan is based on their property specialization (if there are any) and the risks they are comfortable taking.
- Hard money loans are short-term. You will not have the luxury of 15 to 30 years to repay your loans. Hard money loans typically need to be repaid anywhere between 6 to 18 months.
- Hard money lenders have their own lending criteria. A private lender, for example, could be your friend, family, or business associate. As such, they may not have any preset criteria before lending you money, giving you more flexibility in negotiating terms. Hard money lenders, on the other hand, come with a specific set of upfront points, interest rates, and defined durations.
Come back next week, where we can go through the “pros” and “cons” to hard money lending. Plus, will it make sense for you and your business.
