What Is A Hard Money Loan?
Hard money loans are financial tools for sophisticated buyers who need to take drastic measures to secure real estate. The sources of such secured lending are usually private investors or syndicates of investors; this type of lending usually has a one-year term; this might extend up to five years in extreme cases.
Hard money is a resource that discretely supports real estate investment and development in communities across the country. Investing in debt secured against real assets is one way that investors can earn income from their capital. It is also one method that developers and real estate investors can use to get the leverage they need to purchase the assets they believe will increase their wealth.
Why Use Hard Money?
Hard money investors put up the cash for properties based on their experience and knowledge of the market. A hard money transaction is a contract that funds real estate purchases in return for a defined rate of interest, points, and other terms stated in the contract.
It is a method to get access to funding for real estate that is faster than the conventional route of applying to a bank or mortgage company for the funds. In return, hard money lenders charge higher rates of interest that reflect the perceived greater risk involved.
Hard money loans can be a way to secure real estate deals that just cannot wait. You might find a property to fix up and flip for a quick profit; hard money would be suitable in this case. Other instances would be for construction loans, land loans, where your credit history might preclude lending or you just need to move quickly to secure a bargain offered by a motivated seller.
What Do Hard Money Lenders Want?
Lenders focus on the value of the real estate property against which you will secure the loan, but they will expect you to have equity in the property. For example, if you own land and wish to build on it to sell at a profit later, a hard money construction loan will add to the value of the undeveloped land.
If you have cash for a significant down payment, and you need financing, but cannot go the conventional route for any of the reasons discussed above you can borrow the funds you need from a hard-money lender.
Lenders will provide two-thirds to three-quarters of the equity in the property. Some investors may consider the extra value added by improvements but most will take a conservative stance and would demand interest rates of fifteen percent or more and as much as six points to extend more than the basic. An Internet search will reveal who the local lenders for hard money are in your area. You may also find them at local investment club meet-ups.
The Hard Money Reality
Hard money is not for everyone; if you have the time and financial resources to source conventional lending, then you most likely will not choose it. However, if you need funding quickly to close at a discount to market value, or you just have no other source of finance, hard money lenders can make the deal happen for you at a price. Used wisely, hard money can be an excellent tool for making deals happen in investment real estate.