real estate investor
You are a real estate investor looking to grow your investment portfolio.
These types of loans are usually issued by private investors or companies to fund real estate transactions, for investors such as property flippers, who plan to renovate and resell real estate properties used as collateral for the loan, within a short period of time say like within a year.
A hard money loan is often used as a way to raise funds quickly but at a higher cost, and lower loan to value ratio. Since the loan is not traditionally executed, it takes a short time to get the funding. The terms of the loan is often negotiated between the lender and the borrower. While repayment can at times lead to default, the lender can still profit by selling the property used as collateral for the loan.
How a hard money lending works
Hard money lending is based on the value of the property being used as collateral for the loan, and not on the credit scores of the borrower. Banks do not issue hard money loans which is a preserve of private individuals or companies, that see value in this type of potentially risky dealing.
The higher costs of such a loan is often offset by the fact that the borrower tends to pay off the loan relatively quickly, usually within a period of one to three years. Hard money lending is a business model that can be practised as an income generating alternative investment.
Steps to becoming a hard money lender
Hard money lending can offer several benefits for investors and if you are interested, there are a few steps you can take such as;
Start your business by obtaining the required insurance and licenses.
Create a legal framework for your business.
Research to identify your preferred lending targets.
Sign up to a peer to peer lending platform or network to search for possible investments and clients.
Try and assess any potential clients by calculating their loan to value ratio with regards to the offered collateral.
Who should consider being a hard money lender as an investment option?
You may want to consider investing in hard money lending if:
Career professional
You are in a profession with a great income or have surplus cash.
retirement savings
You have a big retirement savings account.
retired investor
You are retired and are searching for a passive income investment.
trust fund
You own an estate or trust fund.
successful business
You are a successful business tycoon or entrepreneur.
lottery winner
You have won a huge lottery and have disposable cash.
family & friend
You are able and willing to offer a helping hand to a friend or family member.
Advantages of Hard Money Loans
Quick and easy process
Since hard money lenders are not interested in your credit score or your debts, you could access your loan in a few days or weeks. Their only interest is in how much value is in your collateral property or asset used in backing the loan.
No borrowing limit
You can be able to get up to 100% of your needed financing from a hard money lender without need for a down payment. The only fee you may be required to pay is origination fee and the monthly interest for the loan.
Building relationships
If you have a good history with a hard money lender of paying your loan back on time or early, the lender will most likely build a good working relation with you. This may work to your advantage as they may be willing to loan you more funds, reduce origination fees and interest due, and the time taken to receive the loan.
Great for first time investments
Hard money loans can allow you to buy property with very little funds of your own.
The loans are normally processed very fast and can be for as much as 100% of the purchase price of the asset you want to own.
Disadvantages of Hard Money Loans
High above standard interest rates
Hard money loans do charge a much higher interest rates when compared to normal loans. Most hard money lenders do charge double digit interest rates due to lack of financing options for potential borrowers. Since the lender is also taking a risk by giving you the loan, the 10% to 20% interest charged is normally used as an incentive to have you pay back the loan quickly, to avoid default and losing your collateral asset.
Very high origination fee
An origination fee is a percentage of the loan charged as a fee by a hard money lender, to process a loan. Due to the risky nature of such an investment, the lender may charge as much as five times the amount a bank would normally charge.
Loan is short term not long term
Hard money loans are usually paid back within a few months or a few years due to the prevailing high interest rates. Repayment terms and durations, however, does depend on each contract signed between a borrower and a lender.
Risk of losing property
Due to the higher than normal interest rates charged by a hard money lender, default in making payments due on the loan will put you as a borrower, at risk of losing your property used for collateral. The loan is supposed to be a short term fix for your funding needs.
Why Use Hard Money Loans?
Why would you even consider a hard money loan if it is so expensive? Well, you should give it a try if it is proving difficult to get funding from traditional lenders such as banks, when you need the money. Hard money loans are useful due to;
Speed
A hard money lender is usually less concerned with your credit scores, income, or bank statements, meaning, you simply need to put up an asset as collateral to access the loans quickly.
Flexibility
Hard money loan agreements are usually more flexible since the lenders don't rely on a standardized underwriting process. Instead, each loan deal is evaluated separately and depending on your situation, you may be able to alter terms like repayment schedules.
Quick Approval
Provided you have a collateral, a hard money lender will give you a loan as much as the investment property you are buying is worth. When you need to borrow against another property you own, that property’s value is what the lender takes into consideration.
Where can you get a hard money loan?
Hard money loans can easily be obtained from hard money lenders such as groups of private investors or from an individual investor with enough disposable income.
Who needs a hard money loan?
Real Estate Investors
Hard money loans are more common in real estate transactions since banks and other lenders would often rate such investments as being too risky.
Poor Credit
Hard money loans are often preferred by individuals with poor credit scores who are unable to get funding from financial institutions. Despite the bad credit ratings, a good enough equity in a property may just interest a hard money lender and convince them to give you a loan.
The costs associated with a hard money loan to you the borrower is usually higher compared to getting funding through banks and other lending institutions, indicating the high risk that the hard money lender is taking by offering you the financing. Despite all that, a borrower is able to get a loan faster, an easy approval process, and potential flexibility in the repayment terms.
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