3 Tips to Investing in Real Estate with Hard Money Loans
Know Your Basics: What is a hard money loan? A hard money loan is asset-based financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk and shorter duration of the loan. Most hard money loans are used for projects lasting from a few months to a few years. The qualifying criteria for a hard money loan varies widely by lender and loan purpose. Credit scores, income and other conventional lending criteria may be analyzed. However, most hard money lenders primarily qualify a loan amount based on the value of the real estate being collateralized. Often hard money loans are given to residential and commercial real estate investors and developers whose projects meet specific requirements of the lender. Typically, these projects are short-term flips, rehabs or new construction. Hard money loan investors are private individuals seeking low-maintenance, short-term, secured investments. Many are looking for stock market alternatives and enjoy the ability to invest in real estate without the hassles associated with landlording or construction. Some are also active real estate investors that want to diversify their existing real estate portfolio with notes.
Know The Benefits:
There are many benefits to Hard Money lending, and using this method in the correct circumstances can be a very effective strategy. Situations such as fix and flips, land loans, construction loans, when the buyer has credit issues or when a real estate investor needs to act quickly are all examples where hard money lending is a great option. A hard money loan is simply a short-term loan secured by real estate. They are funded by private investors (or a fund of investors) as opposed to conventional lenders such as banks or credit unions. The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term. Real estate investors choose to use hard money for many different reasons. The main reason is the ability of the hard money lender to fund the loan quickly. In most situations, hard money loans can be funded within a week. Compare that to the 30 – 45 days it takes to get a bank loan funded. The application process for a hard money loan generally takes a day or two and in some cases, a loan can be approved the same day. Good luck hearing back about a loan approval from your bank within the same week!
Avoid Real Estate Scams:
Look out for any lender who will offer to lend you money at the exact terms you’re looking for. Companies that are willing to bypass background, credit checks and other standard practices should also raise red flags. On straight purchase deals, most hard money lenders cap out at 65%. Unfortunately, there are no shortage of scammers who use the ploy of stating they can lend on high Loan to Value deals to suck in desperate borrowers. Usually the only time you see 100% Loan to Values are on back to back closings when there is an end buyer lined up. In any other deal a lender is going to want to see “skin in the game”. There may be a rare exception when you line up a severely undervalued deal and you find a hard money lender willing to loan based off value instead of purchase price. Unfortunately, this is very difficult to find. Most will want to see some form of contribution from you. The main ‘scam’ you need to worry about is fees charged upfront. And yes, if you don’t have 20% to put down, you will find it very difficult to find a legit lender. It takes cash to own and operate a large rental property, more than just the down payment.
About The Author:
Chad Chiniquy was drawn to the Real Estate world when his experience at a Real Estate consulting firm in the late 1980’s opened his eyes to the endless possibilities of flipping houses. Chad owns a successful lending company that has been helping people across the country for the past 20+ years. Currently Chad lives and works in San Diego, CA. He travels across North America to educate people how to invest in Real Estate and use lending sources to generate wealth. He is a sought after public speaker and an active Real Estate investor with multiple projects across the country. Learn more at www.chadchiniquy.com.