Chances are you are familiar with hard money loans from private lenders. In this article, we will look at some of the pros and cons of using hard money.
There are 3 main benefits of using hard money:
Fast Approval: Whether you are looking to invest in a fix and flip property, a piece of land or a need a construction loan, you want your funds available as fast as possible. Anyone that is remotely familiar with real estate knows the painstaking agony of waiting on a conventional mortgage. Because the borrower wants fast cash, bank loans and their piles of documentation along with all the red tape won’t be the way to go. With hard money loans, you can expect to be approved with a few short days and can receive financing within a week or two.
Collateral Options: Hard money lenders are investing in the value of the property instead of your creditworthiness.
Because of this, they will generally accept various types of collateral as long as it can secure the loan. Individuals with poor credit have a strong chance of a hard money loanapproval.
Flexibility: Unlike traditional lending institutions, hard money lenders don’t use a complicated underwriting system. They look at each deal individually and will work with borrowers to try and make the loan fit their needs.
Hard Money Loans Don’t Work for Every Situation
Before you consider using hard money, you need to see the entire picture. There are some cons of hard money, as well:
Short-term: Because these loans are typically used for renovating and flipping property, most hard money loans are strictly available as a short-term solution. Generally, these loans have terms from 6 months to 3 years. When loan terms are so short, a higher interest has to be mandated in order for the lender to make a profit. However, a pro (in this con) is hard money loans are interest-only until the last payment, which is a balloon payment. Hard money lenders also, rarely enforce an early payment penalty.
Higher Interest: Piggybacking upon the previous con, these interest rates can be incredibly high. They usually range from 8%-18%. However, if you are a seasoned real estate investor, with a proven track record, chances are lenders will be incredibly flexible with your terms and repayment plan. However, as a novice more-than-likely you will pay quite high interest rates.
In real estate investing, hard money loans are the main choice of investors.
Hard money is not typically meant for a residential property. It is meant for a situation in which the property will be turned around quickly and a profit is made. In simple terms, hard money should be used for investments. However, borrowers that don’t qualify for traditional lending have another financing option, while they work on their financial situation.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.