How To Use Hard Money Loans For Real Estate Investments

If you are new to this term, a hard money lender, also known as a private lender, is an individual or non-institutional (non-bank) company that provides loans to real estate investors (borrowers) for the purchase or construction of properties. 

The term "hard money" is used because the lender places more emphasis on "hard" assets (real estate) when evaluating a transaction against the borrower's ability to pay, as indicated by his income or credit score. The hard money loans for real estate are generally guaranteed by a note and an act of confidence. 

What is a hard money loan? 

The loans available from a hard money lender are called hard money loans, private money loans, rehabilitation loans or bridging loans. The borrower's goal is usually to buy, repair and return or, in the case of new construction, build and sell the property. In both cases, time is critical. 

The borrowers wish to complete the project as quickly as possible to be able to repay the loan and turn their project into profit. There are many varieties of money loans, but most have the following features: 

• Usually short term (6 to 12 months) 
• Commonly used for corrections and turnarounds, but can also be used to build new properties or to buy and keep 
• Most often used for residential properties, but can also be used for commercial real estate 

How hard money loans work 

Hard money loans, sometimes called bridging loans, are short-term loan instruments that real estate investors can use to finance an investment project. This type of loan is often a tool for real estate developers or real estate developers whose goal is to renovate or develop a property and then sell it for a profit. Hard money loans are issued by private lenders instead of conventional financial institutions, such as banks. 

Unlike traditional bank loans, the ability to obtain difficult money financing is not determined by the creditworthiness of the borrower. Instead, hard money lenders use the value of the property itself to determine whether to make the loan. Specifically, lenders focus on the "value after repair," or ARV, which is an estimate of what the property will be worth once the renovation or development phase is completed. 

The professionals 

There are several good reasons to consider getting hard money loans for real estate instead of a conventional bank mortgage. These are the main benefits offered by this loan option to investors:

• Comfort - Applying for a mortgage is time-consuming, especially thanks to the new mortgage loan regulations implemented. It may take months to close a loan, which puts investors at risk of losing an investment property in particular. With a hard money loan, it is possible to obtain funds in a matter of weeks. That is important if you are financing a large-scale development project and you cannot afford deviations from the timeline until its completion. 

• Flexible terms - Because private lenders offer cash loans, investors may have more space to negotiate loan terms. You may be able to adapt the repayment schedule to your needs or obtain certain fees, such as the origination fee, reduced or eliminated during the subscription process.

• Collateral - With a hard money loan, the property itself generally serves as collateral for the loan. But, again, lenders can allow investors some margin here. Some lenders, for example, may allow you to secure the loan using personal assets, such as a retirement account or a residential property you own. 

The Bottom Line 

Hard money loans are a good option for wealthy investors who need to obtain funds for investment property quickly, without any of the bureaucratic obstacles that accompany bank financing. When evaluating hard money lenders, pay close attention to fees, interest rates, and loan terms. If you end up paying too much for a difficult money loan or you cut the repayment term too short, that can influence the profitability of your long-term real estate company.