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What is a Hard Money Loan?

Posted by ross1031 on June 30, 2017
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Hard Money Loans – What are they and  how do they help real estate investors?

Let’s say you’re interested in investing in commercial real estate property that you know will be an incredible investment but you are short about half of the funds so you need a loan… and fast. This is where a hard money loan or “bridge loans” could potentially serve as a tool for short-term lending and ultimately, allow you as a commercial real estate investor to finance a desired project. You will often see “house flippers” and other real estate developers use this method of financing as they have the ultimate goal to quickly develop properties and sell it to gain a profit.

apartment building

To exemplify the concept of a hard money loan relating to commercial real estate, let’s say you found a building on the market for $1,000,000 that could very well be an incredible investment. The building is completely empty and you know that some renovations and a suitable management company could easily turn it into a great investment, but you are short half of the money that’s needed. Knowing you need money fast, you seek a hard money loan from a private lender instead of conventional financial institutions because private lenders have the ability to quickly provide you with the funds you need. Although there is no income coming in from this building yet, you know you would be able to pay back your lender and earn a decent profit for yourself as well once the investment is made.

Essentially, a hard money loan is a common option that is sought out by investors when funds are lacking and needed quickly because they know they have a great investment in front of them that simply cannot be passed up.

Let’s look at the pros and cons of seeking a hard money loan:

Pros –

  • The amount of time it takes to apply for a typical loan could take months, which can set investors back with the amount of time they have to invest in a desired property. A hard money loan is a convenient way of avoiding the hassle of getting a traditional loan approved and provides the necessary funds quickly.

 

  • Negotiation of loan terms become flexible since they are provided by private lenders so a repayment schedule or other fees can possibly be discussed to meet your needs.

 

  • Because it isn’t a traditional loan, an investor’s creditworthiness doesn’t determine the loan getting approved. Private lenders want to make quick money from the money they loan so they’re willing to loan a large amount of money if they know your investment will be worth it. Because of that, the value of the property that is being invested in determines whether the lender will provide the loan or not and essentially serves as collateral for the loan.

 

Cons –

  • It would be a convenient way of borrowing money and because of that, your cost for the loan would be more as an investor, possibly up to 10 percentage points (an upfront fee for the loan amount) higher than what you would pay for a typical loan.

 

  • Since the purpose of a hard money loan is to provide an investor with funds to finance their desired property and get it back on the market as soon as possible, the repayment period is shorter (usually 2-3 years) compared to standard mortgage loans.

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