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Investing in Real Estate with Hard Money

Posted on Sep 19, 2016

Real estate is a lucrative avenue commonly associated with wealth building and creation of diversity in investment portfolios. For those who are not ready to part with some upfront cash to finance it though, a hard money loan can be quite helpful.

How Hard Money Works

Hard money provides a borrower with an opportunity to receive funds that are secured by a real estate property. Hard money loans are commonly used by real estate investors to get quick financial solutions for their new projects. Those investors whose goal is to build or redevelop a particular property and then sell it for a profit can find this type of financing helpful. Hard money loans are more common among private lenders and informal lending organizations rather than registered financial outlets such as banks, so you must be cautious of all the details.

According to Than Merrill of the real estate education company Fortunebuilders, which specializes in home rehabs:  “Private hard money lenders are integral to the growth of every new investor. They essentially provide the confidence and funding required to complete more deals. Of particular importance, however, is the liquidity private hard money lenders can offer investors and their businesses.”

The most common criterion used to determine if a person qualifies for the loan is where a borrower use his or her property as a security. The loan often does not exceed 75% of the total value of the property based on the quick sale value. The quick sale value is the amount of money the property owner will get if he or she sells the it in a period not exceeding four months. Quick sale value is not to be confused with Fair Market Value, as the Quick Sale Value is much more subjective. However, there are other criteria used to identify those who qualify, and they are different with lenders. Sometimes they consider the purpose of the loan. Others consider credit histories, monthly income, financial obligations and other conventional inquiries.

Benefits of Hard Money Loans

Hard money loans are convenient compared to other conventional types of loans, which are time-consuming. Other loans can take up to one month to close, and this can put serious investors at risk of falling behind schedule and losing out on potentially lucrative investments. Funds from hard money loan can be in the account within days to weeks from the time of application. Investors also have more room for further negotiations to the rates and other loan terms. The most common advantage of this loan is that there is no extensive collateral needed to secure it. Using the property itself or other personal items is just enough.

Hard money loans are pretty common in the United States and Canada. It is an alternative form of financing that has been used since the 1950s as the last resort for property owners. However, the interest rates for hard money loans are higher than the conventional loans available in mainstream financial institutions.



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