If you’ve been in the real estate world long enough, you may have heard the term “hard money.” But what exactly is it, what’s up with its name, and how does it differ from other types of money?
In this article, we’ll explore what hard money is, how it differs from traditional financing options, and some of the benefits and drawbacks of using it for your investments.
What is Hard Money?
A hard money loan is a type of loan that is secured by real estate, usually for a shorter term and at a higher interest rate than traditional bank loans.
The term “hard money” refers to a hard money lender’s primary focus, which is the “hard” asset (i.e., the property) that’s used as collateral for the loan.
Hard money loans are typically offered by private investors or companies, rather than banks or credit unions, and they are often used by real estate investors who need quick access to funds to purchase, renovate, or develop a property.
The benefits of hard money loans can generally be boiled down to three words: speed, convenience and flexibility.
Speed
The individuals or private companies that offer hard money loans are subject to fewer regulatory requirements than traditional banks.
This allows them to focus primarily on the collateral rather than the borrower’s financial position.
As a result, they require less hoops to jump through and they can make decisions much more quickly than other lenders.
Quicker decisions means quicker funding, and quicker funding means more competitive offers.
Convenience
Once you know a hard money lender’s terms, you know what to expect when you bring them a deal.
Let’s say a lender has a maximum loan to value of 65% and they require a 20% down payment.
If you bring them a property with a $200k After Repair Value (ARV) and purchase price of $100k, you know they’ll be able to lend about $130k (65% of $200k) and they’ll require a $20k down payment (20% of $100k).
As long as you’re working with a high quality lender, you can be confident that if a deal fits their terms, they’re going to fund it.
Flexibility
Unlike traditional lenders, hard money lenders offer borrowers a variety of loan structures to meet their needs.
They may even be able to customize their products for your specific situation.
Some hard money lenders also offer the option to utilize other collateral to decrease the size of your down payment and/or increase the size of your loan.
Drawbacks
There are other pros to hard money loans in addition to the ones above, but there are also cons.
For example, hard money loans typically have higher interest rates and fees than traditional loans. Depending on the lender, you may also be required to put more money down for the purchase of the property.
The reason for hard money being more expensive than traditional financing is because it’s considered higher risk. Since hard money lenders are more concerned with the collateral than the creditworthiness of the borrower, there’s a higher likelihood of default.
Finally, hard money loans are essentially bridge loans, which means their terms are much shorter than terms for traditional loans. The length of a hard money loan is typically one year or less.
Conclusion
Hard money loans are a useful tool for real estate investors who need quick access to funds, might not be bankable, or are buying uninhabitable properties. They charge higher interest rates and fees to compensate for their higher risk, but they offer speed, convenience, and flexibility that traditional loan products simply can’t.
It’s important to note that hard money loans are not a one-size-fits-all solution for real estate investors. They are best suited for investors who have a clear plan for how they will use the funds and a clear exit strategy in place.
As with any financial decision, it’s crucial to weigh the pros and cons of hard money loans before deciding whether they align with your goals and financial situation.
If you have questions or want to learn more about hard money loans, feel free to shoot us an email at info@sharpercapitalpartners.com or give us a call at +1 (513) 334-7501.
