Hard money loans are short-term higher-interest loans that assist real estate developers and investors acquire property and bankroll expenses related to their real estate projects so that they remain solvent, liquid, and increase their chances of success. They’re an integral part of the real estate investing process with some clear upsides and downsides. This article covers the pros and cons of hard money loans.
The Pros of Hard Money Loans
There are several reasons why serious real estate investors rely on hard money loans to finance fix-and-flip projects. Here are the top benefits of hard money loans for house flippers:
l Speed – Hard money loans can be acquired much more quickly than traditional bank loans. They do not usually require credit checks and other due diligence that causes the process to move more slowly at banks. Many hard loan lenders are able to provide money for real estate investments because their primary consideration is whether an investment is a good deal or not.
l Flexibility – Every hard money lender has its own criteria to loan money for a real estate project. Most hard money loans do not come with a list of restrictions that usually beset conventional loans. For that reason, they are more flexible and allow real estate investors to change project goals midstream if necessary.
l Leverage – Hard money loans provide tremendous leverage for fix-and-flip investors. Investors can enter a project without putting their own money at risk and remaining liquidity.
The Cons of Hard Money Loans
While there are incredible benefits to using a hard money loan for fix-and-flip real estate investments, there are some downsides. Before taking a hard money loan, do your due diligence on the loan, the lender, and, of course, the property investment.
Some downsides to hard money loans include:
l Interest rates – All real estate investors should consider the cost of capital. Hard money loans are typically higher-interest loans because they are riskier for the lender.
l Higher-risk – The lender is not the only person assuming risk on hard money loans. The borrower is also taking a risk. Because the loans are higher-interest and short-term, these loans are riskier because they can lead to high financial burdens if not entered wisely.
l Must be paid back quickly – Hard money loans are short-term loans. They are typically for 12 months or less, and the investor is on the hook for repaying the loan in the time frame specified. If they are not paid back on time, the investor may be seen as a more significant risk on the next loan and find it difficult to get a loan for their next fix-and-flip project.
Where to Find Hard Money Loans
Hard money loans are not hard to find. Banks, however, do not offer them. Years ago, local private real estate lenders were the primary source of hard money. More recently, however, the JOBS Act of 2012 has made it easier to find hard money loans online. Real estate crowdfunding platforms, marketplace lenders, and other peer-to-peer business models may or may not refer to themselves as hard money lenders, but that is, in essence, their service.
When you are ready to fund your next fix-and-flip property, be sure to conduct your due diligence on potential lenders thoroughly. Whether you get your hard money loan from a single lender or from an online marketplace with multiple investors financing your project, make sure you look at the lender’s loan history and review the terms of your loan closely. Ultimately, you’ll want to find a partner with a track record of success lending on the property type you’re interested in developing so that you can grow together over time with more successful projects down the road.
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