If you are new to real estate investing you may or may not have heard of a hard money loan. You may want to start flipping houses, but don't have all of the cash necessary to complete the transaction. This is where a hard money loan might come in handy for you. In this short article we will cover what a hard money loan is and when to use them in your real estate investing business.
What Is A Hard Money Loan?
Joshua Dorkin wrote a post on Bigger Pockets that explains what a hard money loan is:
Hard money lenders (HMLs) are typically private individuals or small groups that lend money (Hard money) based on the property you are buying, and not on your credit score. Usually these loans cost (percentage-wise) much more then an average mortgage, often times up to twice what a regular mortgage does, plus high origination fees....
Hard money loans are easily accessed and cut through the red tape. If you can develop a relationship with a LOCAL hard money lender, you can get funds within a couple days, and sometimes with no appraisal or other costs (except for origination fees of course).
Read Joshua's Full Article "Hard Money: What Is It and How Do Hard Money Loans Work?"
We thought that was a perfect explanation of what a hard money loan is, which is why we included it.
Usually it's flippers (quick turn for retail sale) that want to use hard money loans because the cost of using this money is so high that it doesn't make sense to use it for a rental property. However we have come across some larger hard money lenders that can do a hard money loan on a property to complete renovations and get a property ready to rent, then convert the hard money loan to a conventional 30 year mortgage once the repairs are completed and the property is rented, thus bringing down the costs of borrowing the money and making more sense for the investor.
Advantages and Disadvantages of using Hard Money
Rebecca Lake wrote an article on Investopedia that explains in great detail the Pros and Cons of using hard money loans to finance your investment property:
Hard money loans aren’t a perfect financing solution. There are two primary drawbacks to consider:
- Cost – Hard money loans are convenient, but investors pay a price for borrowing this way. The rate can be up to 10 percentage points higher than for a conventional loan. Origination fees, loan-servicing fees, and closing costs are also likely to cost investors more. (See also: The Complete Guide to Financing an Investment Property.)
- Shorter repayment period – The purpose of a hard money loan is to allow an investor to get a property ready to go on the market as quickly as possible. As a result, these loans feature much shorter repayment terms than traditional mortgage loans. When choosing a hard money lender, it’s important to have a clear idea of how soon the property will become profitable to ensure that you’ll be able to repay the loan in a timely manner. (See also: How to Calculate ROI for Real Estate Investments.)
There are several good reasons to consider getting a hard money loan instead of a conventional mortgage from a bank. Here are the main benefits this lending option offers to investors:
- Convenience – Applying for a mortgage is time-consuming, particularly thanks to new regulations on mortgage lending implemented as part of the Dodd-Frank Act. It can take months to close on a loan, which puts investors at risk of losing out on a particular investment property. With a hard money loan, it’s possible to get funding in a matter of weeks. That’s important if you’re funding a large-scale development project and can’t afford deviations from the timeline to completion.
- Flexible terms – Because hard money loans are offered by private lenders, it’s possible for investors to have more room for negotiation of the loan terms. You may be able to tailor the repayment schedule to your needs or get certain fees, such as the origination fee, reduced or eliminated during the underwriting process.
- Collateral – With a hard money loan, the property itself usually serves as collateral for the loan. But again, lenders may allow investors a bit of leeway here. Some lenders, for instance, may allow you to secure the loan using personal assets, such as a retirement account or a residential property you own.
Read Rebecca's Full Article "Using Hard Money Loans for Real Estate Investments"
Really good comparison from Rebecca. One point that we really like about using hard money loans that she points out is that the subject property is collateral. This can be very beneficial for investors who have bad credit. This means that the lender is actually lending you money based on the numbers of the property. However, most of the time you will have to have some money to put down or use for repairs because these lenders want you to "have some skin in the game", otherwise the risk of you walking away maybe to high for them.
Summing It Up
Hard money loans can be very beneficial to investors. If you don't have enough cash to buy and repair a property to sell it retail a hard money loan maybe just what you need. Shop around, find the best deal you can and visit REIA's and connect with other investors and find out who their favorites are.
If you are an investor looking for Atlanta wholesale deals for fix and flip, be sure and check us out!