What is hard money in real estate?
The term “hard money” reflects the fact that these loans are secured by the value of the property itself, making them less dependent on the borrower’s creditworthiness and more on the property’s potential value. Real estate hard money loans are short-term, collateral-based loans provided by private lenders. They’re ideal for quick property purchases, renovations, and investments.
Real estate hard money loans, sometimes called private money lending, have these general elements.
Real estate hard money loans are Short-Term
Hard money loans are usually short-term loans with a typical duration of around 6 to 24 months. They are intended to provide quick financing for projects that may not qualify for traditional bank loans or where a fast turnaround is necessary.
Property-backed loans have High Interest Rates
Because hard money loans are considered riskier due to their short-term nature and the collateral-based approach, they often come with higher interest rates compared to traditional mortgage loans.
Collateral-based loans give Quick Approval
Hard money loans are known for their faster approval process compared to traditional loans. This is because they focus more on the property’s value and potential profitability, and less on the borrower’s credit history.
Private lending is Collateral-Centric Loans
The primary basis for approval is the value of the property being used as collateral. Lenders assess the property’s value and its potential to generate income or be resold. This means that borrowers with poor credit or financial history may still be able to secure a hard money loan if the property’s value justifies the loan amount.
Loan-to-Value (LTV) Ratio
Lenders will often provide a percentage of the property’s value as the loan amount, known as the loan-to-value ratio. This ratio can vary, but it’s typically around 50% to 70% of the property’s appraised value.
Private money lending can be Riskier Borrowing
Hard money loans can be risky for borrowers due to the high interest rates and short repayment terms. If the borrower is unable to repay the loan within the specified period, they could potentially lose the property.
Hard Money is a Creative Real Estate Financing Option
Hard money loans are commonly used by real estate investors for purposes such as purchasing distressed properties, renovating properties for resale, or taking advantage of time-sensitive investment opportunities.
Up Front Fees
Conventional mortgages have high up-front fees but many times borrowers do not notice them because they can be rolled into the loan. Collateral-based loans also do this method. Hard money loans and traditional loans both have up-front fees but understanding what they are and how much is critical for the borrower to understand.
It’s important for borrowers to thoroughly understand the terms, costs, and risks associated with hard money loans before pursuing them. While they can be a valuable tool for real estate investors, they are not suitable for every situation and should be used cautiously and strategically.
Who makes hard money loans?
Hard money loans are typically provided by private individuals, companies, or groups of investors who specialize in real estate lending. These entities are often referred to as “hard money lenders” or “private money lenders.” Unlike traditional banks or financial institutions, which have standardized loan processes and strict credit requirements, hard money lenders are more flexible and focused on the collateral (the property) rather than the borrower’s credit history.
Here are some common types of entities that may make hard money loans:
Private Individuals: Some individuals with surplus capital may choose to invest their money by providing hard money loans to real estate investors. These individual lenders may be experienced real estate professionals or simply individuals looking to earn a higher return on their investment.
Private Lending Companies: There are specialized companies that focus on providing hard money loans to real estate investors. These companies often have a team of experts who assess the value and potential of the properties being considered for financing. How to find private lending companies?
Real Estate Investment Groups: Groups of investors, often organized as partnerships or limited liability companies (LLCs), might pool their resources to offer hard money loans. These groups can collectively provide larger amounts of capital for lending.
Real Estate Crowdfunding Platforms: Some online platforms connect real estate investors with individual lenders who are willing to provide hard money loans. These platforms can facilitate the lending process and provide a marketplace for borrowers and lenders to connect.
Mortgage Brokers: In some cases, mortgage brokers may have access to connections with private lenders who are willing to provide hard money loans. These brokers can help borrowers find appropriate lenders based on their specific needs.
Real Estate Networking Events: Real estate networking events and investment clubs can be places where borrowers can connect with private lenders who are interested in funding real estate projects.
It’s important to note that while hard money lenders offer more flexibility and faster approval processes compared to traditional lenders, they also typically charge higher interest rates and fees. Borrowers should thoroughly research and evaluate potential lenders, understand the terms of the loan, and assess the overall cost and benefits before entering into a hard money loan agreement.
Hard money lenders should be part of a real estate investors’ network. Developing a relationship with these types of funding resources will create opportunities. And real estate opportunities are a powerful wealth building strategy.
Dan Parisi real estate investor
Why would a person buying real estate want a hard money loan?
A person buying real estate might consider obtaining a hard money loan for several reasons, depending on their specific situation and investment goals. Here are some common scenarios where a real estate buyer might opt for a hard money loan:
Speed and Agility: Traditional mortgage loans can take a significant amount of time to process due to the rigorous underwriting and approval processes of banks. In contrast, hard money loans are known for their faster approval times, which can be crucial when a buyer needs to move quickly to secure a property, especially in competitive real estate markets.
Property Condition: If a buyer is interested in purchasing a distressed or run-down property that may not meet the standards required for a conventional mortgage, a hard money loan can provide the necessary financing for repairs and renovations. Once the property is improved, the buyer can potentially refinance with a traditional lender.
Limited Credit History or Poor Credit: Buyers who have limited credit history, a lower credit score, or past financial issues might struggle to qualify for a traditional mortgage. Hard money lenders are primarily concerned with the property’s value and potential, making them more willing to lend to buyers with less-than-perfect credit.
Short-Term Investment Strategy: Real estate investors often use hard money loans for short-term investment strategies, such as purchasing properties to renovate and quickly resell (known as “fix and flip”). Since these loans are short-term and designed to fund the purchase and renovation phases, they align well with investors’ strategies to maximize profits within a limited timeframe.
Investment Opportunities: In situations where an attractive investment opportunity arises that requires immediate funding, such as a foreclosure auction or a time-sensitive deal, a hard money loan can provide the necessary capital to secure the property while the buyer explores longer-term financing options.
Lack of Traditional Financing Options: Some properties may not meet the criteria for traditional financing due to their unique characteristics or unconventional use. Hard money lenders are often more willing to assess the property’s value and potential based on its specific attributes.
Flexibility: Hard money lenders are more flexible when it comes to loan terms and conditions. This flexibility can allow buyers to negotiate terms that suit their specific needs, such as customized repayment schedules or creative arrangements.
Non-Owner-Occupied Properties: Hard money loans are typically used for investment properties rather than primary residences. Investors looking to purchase rental properties or other non-owner-occupied real estate may find hard money loans to be a viable option.
Is hard money considered creative real estate financing?
Hard money lending can be considered a form of creative real estate financing due to its flexibility, alternative approach to lending, and its ability to address unique real estate investment scenarios that may not be accommodated by traditional financing options. Creative financing like Real estate installment purchases, Subject-to purchase, Private money lenders, Hard Money Loans, Lease options and other creative ways to buy property could use the services of a real estate consultant.Other forms of creative real estate financing are seller financing, lease options, joint ventures, partnerships, subject-to deals, Installment purchase contracts and land leases.
How is hard money used in a fix and flip real estate transaction?
I have used hard money loans to do some of my fix and flip property deals. Hard money loans are commonly used in fix-and-flip real estate transactions as they align well with the short-term nature and value-added focus of these projects. Fix and flip involves purchasing a distressed or under-performing property, renovating or improving it, and then selling it at a higher price to realize a profit.
7 aspects of a hard money loan that is typically part of a fix and flip real estate transaction:
- Property Acquisition: The investor identifies a property that has the potential to be improved and sold at a higher price. Traditional financing options might take too long to secure, so the investor turns to hard money to quickly secure the property. The hard money lender assesses the property’s value and the investor’s plan to determine the loan amount.
- Down Payment: While hard money loans are often based on the property’s value, the investor might still need to provide a down payment, usually a percentage of the purchase price. The exact percentage can vary based on the lender’s policies and the perceived risk of the investment.
- Renovation and Improvement: The investor uses the hard money loan to finance both the purchase of the property and the cost of renovations and improvements. These improvements are aimed at increasing the property’s value, attractiveness, and potential resale price.
- Loan Repayment: Hard money loans typically have relatively short terms, usually ranging from six to 24 months. During this time, the investor works on the property, completes renovations, and prepares it for sale. The investor will need to make interest payments on the loan during this period.
- Property Sale: Once the property is renovated and improved, it’s listed for sale in the real estate market. The goal is to sell the property at a price that covers the loan amount, interest payments, renovation costs, and generates a profit.
- Loan Repayment and Profit Realization: When the property is sold, the investor repays the hard money loan along with any accrued interest and fees to the lender. The remaining amount after loan repayment and associated costs is the investor’s profit from the fix-and-flip project.
- Potential Refinancing: In some cases, after the property is renovated and its value has increased, the investor might choose to refinance the hard money loan with a traditional mortgage. This can help lower the interest rate and extend the repayment timeline, allowing the investor to hold the property as a rental or for other purposes.
It’s important to emphasize that while hard money loans offer speed and flexibility, they come with higher interest rates and fees compared to traditional mortgage loans. This can impact the overall profitability of a fix-and-flip project. Investors should conduct thorough market research, accurately estimate renovation costs, and have a solid resale strategy in place to ensure the success of their fix-and-flip endeavor when using hard money financing.
Don’t Let Funding Hold You Back. Explore Hard Money Loans for Faster Real Estate Success!
The real estate consultant needs to provide value to the client with their knowledge and experience about real estate hard money loans. Clients ultimately hire a real estate consultant to ensure that they will achieve their desired return on investment ROI. The consultant should give the client the information they need to make a quality decision to buy or sell a property. Creative financing like Real estate installment purchases, Subject-to purchase, Private money lenders, Hard Money Loans, Lease options and other creative ways to buy property could use the services of a real estate consultant.The real estate consultant can also build out an asset strategy to improve the client’s real estate portfolio. Check out the contact us for more ways to reach us.
Coffee Real Estate and Dan Parisi are ready to help with your real estate consultant needs. They are local Sacramento and Northern California real estate agents ready to help you with a home sale or your goal to be a home owner or real estate investor.
