How to Invest in Hard Money Loans

Hard money loans can be an excellent way to secure a real estate investment. Real estate investors, house flippers, real estate developers and rehabs use hard money loans since it is a quick and easy way to secure financing.

The interest rates are higher but borrowers can access funds much faster. A hard money loan is based on the asset being bought rather than the borrower's credit ratings. 

When looking for a hard money lender, find a reputable company with a long and trustworthy track record in the industry. The purpose of investing in hard money loans is to secure a property to renovate or develop, and ultimately sell for a profit. 

The loans are asset-based and are not contingent on the borrower's creditworthiness. Hard money loans come with additional costs and fees. The closing costs on your investments are likely to be more with a hard money transaction.

The loans are often contingent on a quick return on investment for the investor. This means they are required to be repaid in 8 to 12 months.
Hard money lenders charge fees to the borrower for providing the loan. 

Points on a hard money loan can range anywhere from 2% to 4% of the total loan amount. Interest rates depend on lender and the calculated risk of the loan. Hard money loans carry an interest rate of 10% to 15%.

To qualify for a hard money loan, most lenders will review the borrower's investment history. They will also verify the property value for the asset in question. Lenders may require a 30% to 40% down payment to secure a loan. 

How do hard money investors or lenders make money?

Hard money lenders provide loans based on either a loan-to-cost (LTC) ratio or loan-to-value (LTV) ratio. The ratios measure the risk of the loan by comparing the loan amount to the cost and value of the underlying real estate. 

Most lenders are willing to fund 60 to 70 percent of a property’s ARV. Hard money lending tends to be localized. The knowledge of local real estate market is extremely important to enable property inspection. 

t also helps in understanding of actual market values and transactions. Private individuals with disposable income can invest in hard money loans. The investors may invest in individual loans or in a fund that manages a portfolio of loans. 

This can mitigate the risk associated with any single loan going into default. Hard money investors make money from interest payments on the loan advanced. If you default on the loan at any point, the lender takes the property and sells it.

The lender would only need to sell the home for 40% to 50% of its original sales price to pay off the outstanding loan. Hard money loan investments earn investors returns of 7% to 12%. 

How to become a hard money lender

Hard money loans are short-term financing. The loan term lasts between 3 and 36 months. Investors are interested in buying low and quickly flipping a sale for a profit.

They often do not intend to hold on to a property for a long time. If you're looking for alternative financing for an investment property or want to put idle money to work, it may be worthwhile to look into hard money lending business. 

No watching stocks, managing contractors, or dealing with tenants. You’re just collecting interest payments.

To become a hard money investor, you need to be an accredited investor. Private money lending is an alternative option for financing an investment property.

A hard money lender secures their investment using a note, mortgage or security instrument. The investor receives a return on investment.

Hard money lending is private and it is up to the lender, and the borrower to establish the terms of the loan.

As long as the property is being used for investment purposes, the investor can determine the interest rate or loan terms that are agreed upon between both parties.  


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living room

Requirements for hard money lending

  • Private money lending is great for individuals with surplus cash in a savings account.
  • Have a sizable retirement savings account they want to continuously grow like an individual retirement account (IRA) or 401k.
  • Are looking for passive income or want to participate in the real estate market without active involvement. 


What are the advantages of being a hard money lender?

  • Earn a higher rate of return. Receive a higher rate of return of 6% to 15% than most savings accounts offer.
  • Earn passive income secured by real estate. Invest in the real estate market passively while receiving a return on investment.
  • It is a passive investment. The investment requires very little ongoing work after vetting the borrower. 


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model house key

What are the disadvantages of being a hard money investor?

  • Risk of borrower default. Even with the most thorough due diligence, the borrower may not pay and you may have to foreclose or take costly legal action.
  • Having to vet investment property and the borrower.  


How to become a hard money lender


Decide the source of funds

You need to decide where the funds will be coming from and how much you are willing to lend. 

You may have cash in a savings account, or may need to convert a traditional IRA or 401k plan into a self-directed IRA plan.

Determine how much you are willing to loan at any one time. Diversifying your funds across different investment opportunities to mitigate risk. 

Find the right property

Identify an investment opportunity to lend on. You can find potential investors by attending local investment associations. 

It is ideal to start with people you know and trust. Ensure to work with individuals who have gone through the proper steps to work with you as a private money lender. 

Conduct your due diligence

Know how to analyze and review a real estate investment. It is your job to vet the borrower and the investment property.

Research the borrower’s background check or credit report. Be confident that the borrower and the investment property are worth investing in. 

Determine lending terms

Determine the terms of the loan. You can offer similar loan terms or negotiate based on the investor and investment opportunity.

Some lenders may require a down payment. It is up to a lender and borrower to establish suitable terms for the loan.

Terms may include interest rate, type of interest (adjustable or fixed), length of loan (time for repayment), closing costs or fees (like points), and whether there is a balloon payment. 

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Finalize paperwork

Have a licensed attorney draft or review any paperwork relating to a hard money loan. This will ensure both parties are adequately protected. 

Begin payment collection

Keep good records of all the payments the borrower has made. This reduces your risk if the borrower defaults.

Becoming a hard money lender can be a good option if you have money, or want to grow your investment portfolio. 

Investing passively in real estate must be done properly. Hard money lending provides immediate working capital to help investors purchase or repair a property. 

Offers provided to investors are based on the value of the property. Hard money lending deals are secured through the value of the property. 

A thorough inspection is required for all deals to confirm the projected value of an investment property. 

How to pay back a hard money loan


Sell the property

This is a common option since many borrowers use hard money loans to buy, improve, and sell a property for a profit. 

It is easier to pay off a hard money loan this way. This strategy is only useful if a borrower has investment knowledge, and expertise to know which properties can maximize profit.  

Refinance

Refinancing is a good option, if an investor’s plan was not to flip a property. 

This strategy provides a long-term stream of income. Refinancing with a traditional lender can ensure the original loan is paid off. 

Hard money loans can also be used as a bridge loan for another loan. 

Get a new loan

You may also be able to get an additional hard money loan, to pay off a loan and avoid foreclosure.

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tower apartments


Traditional mortgage loans

If your plan is to stay in the property, a great exit strategy is to secure a traditional mortgage loan. 

A hard money loan can give you time to build up credit, or pay down debts to lower your debt-to-income ratio.

You can use the 1-3 year time period of a hard money loan to get a traditional mortgage loan. 

Other loans

You can use other loans to pay back a hard money loan, and provide long-term financing for the property.

Use business finances

Consider using your business finances to pay off a hard money loan. The finances can be income from other business properties, investors, or profits.

Whatever option you choose to pay back a hard money loan, make sure you have backup plans to prevent defaulting on your loan.  

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