While those outside of the industry may be less familiar with it, hard money is perhaps the most valuable asset made available to today’s investors. Not only does hard money make it possible for investors to acquire deals, it makes the process easier and more efficient. It is, therefore, in the best interest of every real estate entrepreneur to establish a relationship with a hard money lender. That way, they’ll at least have the opportunity to partake in everything hard money loans have to offer, not the least of which is outlined below.
A hard money loan is a short-term, high interest loan that awards real estate investors the opportunity to purchase rehab projects. Despite their name, however, hard money loans have become synonymous with some of the easiest sources of capital for today’s real estate investors to secure.
Hard money lenders are organized, semi-institutional lenders who are typically licensed to lend money to real estate investors. By default, hard money lenders are not associated with institutionalized banks and are therefore able to cater to a more niche audience: real estate investors. Due to their unique position, hard money lenders may lend money for both the costs associated with the acquisition and rehab.
Unlike traditional bank loans, hard money loans don’t have an untold amount criteria designed to limit access, nor do they rely on a credit history for approval. Instead, hard money loans are asset-based sources of funding, which means the lender bases the majority of their decision to lend on the proposed subject property. This means hard money lenders are more interested in the potential of the property than the borrower’s credit history. That’s not to say a hard money lender won’t inquire about a borrower’s financial status, but rather that the emphasis is on the asset. As a result, real estate investors with bad or insufficient credit may qualify for a hard money loan if they present the lender with the right property and opportunity.
It is worth noting, however, that while a hard money loan may be “easier” to secure than their traditional counterparts, they come at a steeper price. Whereas the average rate on a 30-year fixed-rate loan is currently somewhere around 3.750%, it’s not uncommon for hard money loans to reach as high as 15%. Additionally, hard money lenders may ask borrowers to pay upfront fees, or points, to help account for the added risk they are taking on by practicing asset-based lending. This is their way to justify lending to essentially unproven borrowers.
Make no mistake, hard money loans do come with higher interest rates than traditional bank loans, but the higher rate is well worth the cost of doing business with a hard money lender. Their short-term nature means interest will only accrue while the project is active (anywhere from a month to a year, depending on the investor’s experience), not over the course of 30 years.
The shortened loan duration (alone) significantly cuts back on the amount of interest an investor may expect to pay. Additionally, and perhaps most importantly, the amount of time it takes to secure funding from a private money lender is just a fraction of the time one would expect to spend waiting for a bank’s approval. It is entirely possible to acquire the hard money you need and close on a transaction in as little as a few days. Banks, on the other hand, may take months to simply approve an impending loan. Therein lies the greatest benefit of hard money lending: speed of implementation. While interest rates may be higher, the speed in which investors are able to receive funds often makes the difference between landing a deal and losing to the competition.
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There isn’t a single financial relationship more important to the majority of today’s real estate investors than the one they develop with hard money lenders. There is absolutely no reason a good relationship with a dependable private money lender couldn’t take an investor’s career to the next level. Their ability to offer investors quick and easy access to cash are unmatched. Additionally, borrowers may be given access to any or all of the following benefits of real estate hard money loans:
Speed Of Implementation: The Dodd-Frank Act, while designed to protect lenders and borrowers, has significantly increased the amount of time it may take to acquire a traditional loan. It is not uncommon for some banks to take months to approve a lone. However, hard money loans may be had in as little as a few days, or as long as it takes the lender to get the money. Typically, it takes no longer than a week to secure funding from a hard money lender, which bodes well for those looking to buy a house. In a market as competitive as today’s, the sooner one can make an offer, the more likely it will be accepted. Hard money lenders give investors the opportunity to beat the competition to each and every deal.
Negotiable Terms: As semi-institutionalized lenders, hard money lenders aren’t subject to the same rules and regulations as traditional banks. While they are typically licensed to lend money, they usually have the ability to set their own terms. Depending on the lender, however, those terms may be negotiable. A savvy investor may be able to negotiate a better interest rate, or even lengthen the duration of the loan. Either way, it’s important to note that there is room to appease both parties in a hard money transaction.
Qualifications & Criteria: Hard money lenders are familiar with the business of real estate investing. Oftentimes, their success as an investor gave them the opportunity to become a lender. They know the business well, and know what to look for in a respective borrower; that’s why they practice an asset-based lending practice. They don’t complicate things with all of the qualifications associated with banks, but instead look at the subject property. They know that a property with potential could return their money, quickly and efficiently if it’s entrusted to the right investors. Therefore, investors with poor credit—or a lack thereof—may be able to secure a loan.
Cash Offers: Hard money lending places cash in the hands of investors, which they are then able to turn around and offer to someone selling their home. While the ability to make a cash offer may not sound like all that much, it’s actually one of the greatest benefits awarded to investors. At the very least, sellers will prefer cash offers over everything else. All things being equal, sellers will choose cash offers over a traditional loan almost every time.
Liquidity: Whether investors have enough of their own money or not, using a hard money lender allows them to remain liquid. Securing funds from another source means investors don’t have to spend all of the money they already have on their next deal, which helps in the event of an emergency.
Volume & Scalability: Using other people’s money means there is never a shortage of funds. If an investor were to use their own money, they would most likely need to spend it all to buy a property. That means they couldn’t even imagine acquiring another deal until they have completely finished their current project. However, using a hard money lender (or lenders) could enable investors to acquire multiple deals at once, maximizing their efficiency. Provided the investor is skilled enough, there’s no reason they couldn’t scale their business faster by working on multiple deals at a time.
General consensus suggests the pros of real estate hard money loans greatly outweigh the cons. Nonetheless, it is wise to take note of the shortcomings that may be present when working with a hard money lender. Here are some of the drawbacks to using hard money lenders for real estate investing:
The House Is Collateral: It is impotent to note that the lender will collect the home as collateral in the event the investors can’t pay them back. When the investor agrees to the terms of the hard money loan, they will hand over the mortgage/trust deed as collateral. That way, the lender will be able to recoup at least some of their losses if things don’t go according to plan.
High Interest Rates: Again, hard money loans have become synonymous with high interest rates, sometimes four to five times higher than traditional banks. Given that hard money lenders are at higher risk than borrowers, they certainly have the right to ask for rates as high as 15%.
Shorter Payback Periods: Most lenders are interested in getting in and out of deals fast, and without a lot of exposure to risk. As a result, they are not typically inclined to offer extended loan periods. More specifically, most of them will want their return within six months to a year, which may place a little pressure on some investors.
Hard money loans can be used for a great deal of transactions, but their most common applications include:
Rehabs (Fix & Flips)
In addition to what hard money loans may be used for, however, it’s equally important to know when using one may benefit investors the most. Hard money loans are best reserved for those who may not qualify for a traditional loan, or those who need to act quickly. The nature of hard money may simultaneously give investors immediate access to cash without having to pass extensive background checks.
The approval process behind hard money loans is nowhere near as exhaustive as a traditional bank. Institutionalized lenders, for example, will require borrowers to jump through countless hoops, all while demonstrating that their credit score doesn’t represent a risk. In fact, most banks won’t even consider lending to individuals with inadequate credit scores—period. Hard money loans, on the other hand, diverge from their traditional counterparts. Instead of conducting extensive background checks, hard money lenders are more interested in the subject property being presented by the borrower. The higher the potential of the property, the more likely they will be to loan to the inquiring borrower. Of course, not all hard money lenders operate the same, nor do they have the same standards. Some hard money lenders, for example, may want to mind their due diligence and require the borrowers to have respectable credit scores; some may even ask for W-2s, tax returns, pay stubs, bank statements, and down payments. Case in point: all hard money lenders are different.
Every investment carries at least some degree of risk, and hard money lenders are no exception. However, hard money lenders have found a useful way to gauge said risk, and perhaps even mitigate some of it: exercising safe loan-to-value ratios. More specifically, the lender may look at the loan-to-value ratio to measure the risk of their investment. In dividing the loan value by the appraised value of the property, lenders may determine how much they are comfortable lending. Consequently, the higher the ratio, the more risk there will be, and the harder it will be for the borrower to secure the loan. Therefore, investors seeking lender approval would be wise to seek lower LTV ratios.
Hard money lenders are not nearly as hard to find as many people make them out to be. In fact, once they realize that they need investors just as much as investors need them, the process becomes a bit more bearable. As a result, you may want to start looking for hard money lenders in the following places:
REIA or MeetUp Meetings: It’s not uncommon for hard money lenders to speak at local real estate meetings. There’s a good chance they will attend the same meetings as investors, as their business depends on investors. In fact, hard money lenders need investors just as much as investors need hard money lenders.
Real Estate Agent or Traditional Lender: Ask a Realtor or mortgage broker if they know a hard money lender. There’s a good chance their previous deals have involved hard money lenders. At the very least, they should be able to point you to someone that has worked with a hard money lender in the past.
Google “Hard Money Lender”: Again, hard money lenders want to work with investors, so sometimes finding them is as simple as performing a Google search. Look for hard money lenders in your area by complimenting your hard money lender search with your exact location; you should find some right away. That said, working with someone new will require you to vet them just as much as they are vetting you.
Of all the people an investor may add to their own network, few are more important than hard money lenders. The ability to gain access to funds, quickly and easily, is nothing short of a competitive advantage. However, hard money loans aren’t simply granted to anyone who asks for them. While they may be easier to secure than traditional loans, there are still plenty of things investors need to know and do to increase their odds of getting a hard money loan. The information in this guide, for example, should lay the foundation for everything today’s investors need to know about finding and acquiring hard money.