The Pros And Cons Of Hard Money Loans
I maintain that hard money loans represent one of the single most advantageous funding opportunities for investors to take advantage of. Few sources of capital, if any, can compete on the same level as hard money and offer the same competitive edge. It is hard money loans, after all, that many investors have to thank for acquiring their deals in the first place. That said, hard money is not without its own caveats. Despite its superior benefits, there are downsides to hard money that warrant the consideration of every investor.
Let’s take a look at the pros and cons of hard money so you can make a more informed decision:
Pros
Securing financing with a hard money loan offers you a number of benefits, including:
- Speed: The Dodd-Frank Act is a financial reform legislation enacted in the past decade. It came with new regulations on mortgage lending, which means a lot of time (often, months) is needed for an investor to close a loan. On the other hand, hard money lending is fast, as you can secure a loan in days or weeks (depending on negotiations). Time is essential, especially for large development projects, and hard money lending can help speed that process along.
- Flexibility: Terms can be negotiated with hard money loans, since you are dealing directly with private investors and funds. Banks are not as flexible.
- Collateral: With hard money financing, the property itself is the collateral for the loan. Some lenders even accept other assets, like your retirement account or stock portfolio, as a basis for securing a loan.
- Resourceful: A lot of the time hard money is used to purchase and rehab distressed properties. By using the after repair value or future value of the property, a hard money lender would be able to provide an advance to purchase the property, and also reimburse the borrower for the cost of rehabbing the property.
- No “Red Tape”: Getting a loan for an investment property with a traditional mortgage is difficult, if not impossible. Traditional borrowers need to worry about LTV ratios, debt-to-income, and several other indicators they need to meet criteria for. However, hard money lenders function as asset-based lenders who are more concerned with the property value than the borrower’s financials.
- Convenience: There is something to be said for the convenience of being able to close with minimal documentation. Having to supply a lender with income documentation, tax returns, and leases can become overbearing and consume your focus and energy. Hard money, on the other hand, cuts out a lot of the headaches.
- Volume: Hard money lenders allow investors to leverage other people’s money. That means investors could potentially fund more than one deal at a time. Traditional loans will do no such thing. If you want to fund multiple deals at a time, you should really consider a hard money loan.
- Competitive Edge: Hard money allows investors to beat out the competition, or at least those using a traditional loan. If for nothing else, sellers prefer a timely transaction that hard money can offer.
Cons
There are, however, certain disadvantages to using using hard money for real estate investments:
- Cost: The convenience that comes with hard money lending may be its primary benefit; however, it is also its main drawback. Given that hard money lenders are at higher risk than borrowers, most demand higher interest rates than traditional loans. Interest rates can range from 7 to 14 percent. Expect other fees to be also at a relatively increased rate, including origination fees and closing costs.
- Short Repayment Schedule: A shorter repayment period is the price to pay for being able to get a property listed on the market ASAP. This can be anywhere between 6 to 18 months. Make sure that you can sell the property and profit in the soonest time possible.
When To Use Hard Money For Real Estate
Though hard money lenders will often issue loans for almost any type of property, certain types of property investments were absolutely made for hard money. Rehab projects, construction loans, and land loans were made to be financed through hard money.
This doesn’t mean that other types of investments should not be financed through hard money. If you, the buyer of a property, have credit issues, or you need to act quickly on a deal before it disappears, the speed and convenience afforded by a hard money loan can be worth its weight in gold.
Not all hard money lenders are the same. They can in fact be your de facto partner in real estate and real estate investing. Interview, talk, and be honest. Hard money lenders are looking for relationships just like you.
