What Is ‘Hard Money’ In Real Estate Investing, And How Does It Work? 

What Is ‘Hard Money’ In Real Estate Investing, And How Does It Work? 

The term “hard money loan” refers to a type of loan that is backed by a “hard” asset, such as real estate. If you’re a real estate investor or house flipper and you need financing for a deal, a hard money loan might be a good option for you to explore.

But as a real estate investing coach who often helps clients navigate the hard money transaction process, I know it’s important to first understand the ins and outs of these loans before making a final decision.

What is ‘hard money?’

Hard money is a type of lending often used in real estate investing. Hard money loans are also known as asset-based loans, bridge loans or STABBL loans (short-term asset-backed bridge loans). Hard money loans are used for short-term financing, and the loans are always secured by an asset. Traditional financial institutions don’t offer hard money loans, so this lending option is only available through private lenders and individual investors. 

As I mentioned above, hard money loans are often used by real estate investors, house flippers and real estate developers. These types of loans can be a quicker and easier way to secure an investment purchase without the need for traditional financing or the approval process that is required by typical financial institutions. Since these types of loans are asset-based, they are not contingent on the borrower’s creditworthiness. 

The purpose of using these types of loans is to secure a property to renovate or develop and ultimately sell it for a profit. An investor might choose a hard money loan over a conventional loan because of the ease of access to the funds. Lending options from financial institutions often have complicated approval processes and weigh heavily on the borrower for approval. Hard money loans are asset-based and typically secured by a mortgage, so their approval process is much faster. In my experience, lenders will review the subject property and can make a lending decision within days.

That being said, these loans are not always the best choice for everyone. Understand that when you acquire a hard money loan, you’ll be paying a premium for the convenience. Not only do these types of loans carry higher percentage points than traditional loans, but they may also come with additional costs and fees. The closing costs on your investments are likely to be more with a hard money transaction as well.

Another downside to consider is the shortened repayment period. Hard money loans are often contingent on a quick return on investment for the lender. This means they rarely exceed 24 months and, in many cases, are required to be repaid in eight to 12 months. For an investor, it’s important that you account for the added costs and shortened time frame when you conduct the analysis of your investment purchases to ensure hard money is a viable option.

What are points and interest rates on hard money?

Hard money lenders typically charge fees to the borrower for providing the loan. These fees are called “points.” Points on a hard money loan are generally equal to one percentage point of the loan but can range anywhere from 2% to 4% of the total amount loaned. Interest rates on a hard money loan can vary greatly depending on the lender and the deal. I’ve found most lenders will provide loans with a fixed interest rate; however, in some cases, you might be able to negotiate a floating rate. Traditionally, hard money loans carry an interest rate of 10% to 15%, depending on the lender and calculated risk of the loan.

What are the borrower requirements for hard money loans?

Hard money loans are supplied by private individuals and companies, so the loan requirements can vary greatly between lenders. However, since the borrower often deals closely with, or directly with, the lender, there’s often much more room to negotiate terms. If it’s your first time requesting a loan, you’ll likely have a harder time getting approved and might need to supply additional information that a veteran investor would not have to supply. In consideration for a hard money loan, most lenders will review the borrower’s investment history, verify the property values for the asset in question and, under normal circumstances, require a 30% to 40% down payment to secure the loan.

Conclusion

Hard money loans can be an excellent way to secure a real estate investment. Real estate investors, house flippers, developers and rehabbers use hard money loans because it’s a quick and easy way to secure financing. Compared to a conventional loan, the interest rates are higher, but the higher rate is offset by the fact that the borrower can access the funds much faster and the loan is based primarily on the asset being purchased rather than the borrower’s personal approval or credit. When looking for a hard money lender, ensure you find a reputable company with a long and trustworthy track record in the industry.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

https://www.forbes.com/sites/forbesbusinesscouncil/2021/05/12/what-is-hard-money-in-real-estate-investing-and-how-does-it-work/?sh=3c0771cc33d7

Doran

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