The Pros and Cons to Hard Money

Hard money is another way of obtaining a real estate loan rather than going through institutional lending. Hard money loans typically come from individuals or investors who rely on hard money loan companies to manage their investment portfolios.

When loans are not approved by banks, or need to be expedited, hard money is a great alternative. Let's take a look at the pros and cons of hard money lending and when it's the best scenario to opt for one.

PROS

• Speed
  • Collateral to the properties in question are very appealing when it comes to lending to private lenders. Some may think that loans are written so the lender can own the property, but that's not entirely true. The collateral is important *in case* the lender has to own the property in either a down-turning market or something happening to the borrower's ability to repay. In any case, lenders don't go through the application with a fine tooth comb, which allows the process to go a lot faster than with traditional banks.
  • Speed also comes in handy when you consistently work with a lender who gets to know you and your story.

• Flexibility
  • Hard money lenders don't use a standard underwriting process. Each loan is manually written to get a greater sense of the big picture of each borrower. You may be able to structure the loans where a certain amount of payments are made up front, so you don't have to worry about making it on a monthly basis if you are doing a construction project and have other things on your plate.

• Approval Process
  • Hard money lenders don't use a standard approval process. Each loan is manually written to get a greater sense of the big picture of each borrower. Lenders are also experts in knowing what their investors are looking for, so when they underwrite the loans, they already have in mind which investor to tailer the deal to.

CONS

• Cost
  • Hard money loans aren't the cheapest route. The loans are typically structured as "interest only" with the amount you initially borrowed due at the end of your term, or when you are ready to pay back the loan.
  • There are also origination costs associated with the loans in terms of "points"- which are percentages based on the amount borrowed.
  • The interest rates also tend to be higher than traditional financing, typically starting at around 8.5% and going up from there. They are however, a great alternative to credit cards which can be outrageous interest rates.

When Hard Money Makes Sense

Hard money makes the most sense when you need a short term fix. People who benefit greatly from these types of loans are:

• Fix and flip investors
• Homeowners bridging the gap between a home purchase and selling of their existing one
• Business owners who need working capital but don't qualify for a business loan
• Purchasing a home through a traditional bank but need extra capital to rehabilitate the property
• Credit repair borrowers

Next Steps

If you've got a loan scenario to that you'd like to run by me, feel free to schedule time to chat HERE.