Hard money loans may have had a dubious reputation in some quarters, but they represent the kind of lending that has helped thousands of real estate investors achieve their dreams. To those suspicious of the concept, hard money lenders may resemble those who gave the lending industry a bad reputation during the financial crisis, and engaged in shady practices with borrowers who were likely to foreclose. Despite this negative image, a vast majority of hard money lenders are ethical and are helpful to the real estate investor who wants to seize an opportunity before it passes.
Hard money loans are short term loans that use property as a guarantee. They tend to have higher interest rates than bank loans, but the borrower receives the money in a matter of one or two weeks rather than several months. The term of the loan is often 12 months, although this period may be extended under certain circumstances. One advantage of this kind of lending is that it is suited to those who are starting out in real estate investing or have a flawed credit record. Those whose credit record is stellar and who don’t need the money immediately may qualify for a conventional bank loan.
A hard money loan is beneficial for those who want to undertake improvements on a property and then resell it. The fix and flip approach to real estate investing is an effective way to invest in real estate, and securing financing from private lenders is an important step towards succeeding at this approach. In addition, financing from private lenders is effective for construction projects or land loans. Those who have had issues in the past with their credit may not qualify for a bank loan, and my find the private lending is the best option.
The calculation that goes into determining the size of the loan involves a ration of the loan amount divided by the value of the property. This number is referred to as LTV or loan to value. Typically, a hard money lender will lend around 65-75% of the property value, but some will take into account the ARV or the after repair value. The latter imposes more risk on the lender, and for an ARV loan, there is usually a higher interest rate.
Whether you want to improve a property and sell it at a higher price or need money for other projects and have been denied a conventional bank loan, hard money loans may be the right option. Look for a private lender with an excellent reputation and a track record of successful lending.