Hard Money Loans - Real Estate Funding Model
Ever wondered about hard money lenders and when they should be used in your real estate investing? Well, here's the layman's guide to getting started with hard money loans. We'll begin by presenting the negative aspects of hard money but introduce the benefits towards the end... so read on.
A hard money loan will often be one of the last resorts for funding your real estate deals because you are dealing with experienced investors who are looking for good returns on their money. That means it is generally amongst the most expensive money you can borrow.
Hard money lenders are third party lenders, which means that they are not tied to big institutional lenders like banks and credit unions. Therefore they can charge interest rates that are above market value, which can be 5-10 points higher than regular lenders. Additionally hard money lenders charge points against the loan. "Points" are defined as prepaid interest against the loan. The additional points make it an even more expensive alternative when borrowing money.
So why would you use hard money loans? Well, for one thing, hard money loans are typically for around 65-70% of the ARV (after repair value) of the property. This is an important point because it means you can get finance for any rehab costs that you have ahead of you and if your ARV is sufficiently greater than your costs you can get into a deal with little or no money down.
A hard money loan is extremely beneficial because you are not qualified based on your credit score or character, but hard money lenders qualify you based on the collateral in the loan. You might be able to get better rates elsewhere, but this offer offers flexibility to those whose credit history or loan serviceability, or even time schedule can't allow for service from a conventional lender.
Where should you look to find hard money lenders? The first place is in the "money to lend" pages of your local newspaper. The second place is at a meeting of your local real estate investing association. Local hard money lenders are often attending to solicit new business. Eventually, do not forget to check on the internet: just search for "hard money loans" or "hard money lenders."
There are several things to know when considering hard money lenders for your real estate transactions. First are some cons to hard money loans, the largest of which is that hard money will be leant to you at a much higher rate than prevalent from other lenders, typically 5-10% higher. They may also charge 'points' on the loan to ensure that they make a good return on it. There are pros to hard money lending as well, typically these types of loan are much easier to obtain and rely less on creditworthiness and more on the security of the loan, so hard money is much more flexible.
Published May 18th, 2007
Filed in Business, Real Estate
