This might be a dumb question but what is the difference between a hard money loan and a personal loan you could receive from a bank or a site like credible? Because I haven't really heard of using a personal loan as an option before when reading up on ways to build capital to invest! So I was just wondering if there was something I was missing, or if a hard money loan is very similar to a personal loan and that's why I've never heard it referenced?
Thanks so much for whatever info y'all got!
Hard money loan for fix and flip is short-term loan, it lends you x% of the purchase price plus the y% of the renovation cost. It has 8-11% interest rate and usually charges 2-3 points. Most of the banks cannot help you on this. You need to look for the hard money lenders. Personal loan is for long-term, usually no renovation cost will be funded. rates are low 3s for primary homes. Most of the banks can help you on this.
The key to understanding it understanding how the loans are secured and to what standards they are being originated.
A personal loan something similar to getting issued a credit card. Someone decides to take a chance on you and if you don't pay it back they basically have to come after "you" to get the money back.
"Real estate loans" are secured by the property, that is the property is put up as collateral. if you don't make your mortgage payments, the lender can start foreclosure proceeds and take ownership of the property. A regular residential conforming loan (e.g. conventional, FHA, USDA, VA, etc.) has a whole series of rules and regs because the loans are resold on the secodary market to Fannie Mae / Freddie Mac. If your lender follows all the regs, they know they can resell the loan to them and thus maintain their liquidity.
Hard money loans are also secured by the property. But, they don't get resold. The terms were pretty well summed above. The loan is by definition a short term interest only loan of 6 to 12 months, owner -UNoccupied. They require little about your income because they are looking at the deal. for new investors rates are high, but get better with demonstrated experience. You can use any hard money lender, but it can be good to work with a local one since they will know the market, sometimes better than you.
I hope this helps. Good luck.
So I think the big difference is going to be the amount of funding you can get. On a personal loan from what I've seen offered most of them max out at $100,000 and that's on the high end. As a lender the average personal loan I see on credit is 10k-13k. So although a personal loan would cost you less in interest you would be very limited on the ability to actually use them to flip a property. Even with $100,000 it would still be hard to acquire a property, complete all rehab and pay holding costs (water, taxes, insurance, etc.) and stay at or under $100,000. At least it would be hard here in most areas. So although its not impossible it is difficult.
The other thing is qualifying for a personal loan is typically not as easy as qualifying for a asset based loan.
If you can get personal loan at 3%-5% and start flipping properties I would say go for it as it would be a great way to maximize your ROI.