Today’s economy has prompted more consumers to move towards becoming real estate investors. Many new real estate investors turn to hard money loans to create more leverage for buying power. One of the main reasons real estate investors are becoming more prevalent is because of the fluctuations in money markets and higher risks of loss along with slow maturity on invested funds. However, many real estate investors have developed the practice of utilizing hard money loans to increase the funds available to better their investment options. For most that wish to get into the real estate investment industry the term, “hard money loan” is new to them.
What exactly is a hard money loan? Basically hard money loans are short term loans secured by real estate. Hard money loans are usually funded by private investors instead of banks or credit unions. Hard money loans have term lengths that only range from 12 months to 5 years maximum in most cases. So this type of loan is basically a short term loan. Another major factor of these hard money loans are the lending terms of repayment. The interest on the loan is usually all that is required to paid on a monthly basis for the duration of the loan. A balloon payment is required at the time of payoff of the loan. In some cases the terms require only interest and a small amount of principle payment monthly. Either way the monthly payments are significantly lower than conventional lending. Lastly, hard money loan amounts are usually based solely on the value of the property being purchased or borrowed against. With this difference in qualifications needed to obtain hard money loans, lenders can and do approve loans more readily. Real estate investors often turn to these loans because they are easy to obtain. Hard money loans can be used to buy properties with minimal monthly payments. Hard money loans create ability to renovate properties for flipping and selling.
A major advantage that real estate investors like is the relatively short time it takes to process a loan request for hard money loans. Usually a hard money loan can be approved and funds available within a weeks time. So, with the quick access to funds needed hard money loans are mostly used by real estate investors. These loans are used for land loans, construction loans, or fix and flip projects. When there is a property of interest for investment with several investors wanting the same property, access to funds this quickly can help keep them in the game.
With all these great conveniences provided by hard money loans you may be wondering if there is any down sides to utilizing this type of loan. The answer is directly related to the interest terms. With it being that hard money lenders are taking on higher risk loans, the interest rates are significantly higher. It is common for interest rates to range from 10 to 15 percent on hard money loans. The use of points paid frequently come into play at rates between 2 and 4 percent of the amount borrowed. On average most hard money lenders will lend at a loan to value (LTV) rate of 65 to 75 percent. Some hard money lenders will increase the amount of funds loaned based on the projected value once the investor has completed the renovation. While this gives even more leverage to the real estate investor, it also increases the liability risks. The interest rates will reflect this increased liability. In some cases the interest will increase to between 15 and 18 percent with paid points as high as 5 or 6 percent especially when little to no down-payment is made.
Now you have the facts on how hard money loans work. The pros of using these loans are obviously speedy approvals, quick delivery of access to funds, and flexibility with underwriting processes. On the other hand the big Con is the cost of using hard money loans. It is highly advisable for any real estate investor, especially new investors in the business to make sure they have a professional real estate agent to get accurate values on the property being used to secure the hard money loan. An agent familiar with market trends where you are investing is pertinent. Careful calculation of the potential resale value versus the cost incurred for the loan, repairs, and processing of the sale of your property should be of utmost importance before agreeing to this type loan. Without careful and realistic projected costs a potentially great investment can become a stressful and financially burdensome experience. The outcome can lead to great financial losses for the investor.
Still need more information on getting started as a real estate investor? Give me a call at 225-772-1807 or schedule an appointment at my online calendar at your next convenient time by clicking HERE