The Pros and Cons of Hard Money for Investors

Hard Money

We’re not talking about coins versus soft paper money.  Hard money in the real estate investment business refers to money from private lenders using collateral rather than a credit rating as the basis for granting the loan.

Hard money loans are quite popular with investors, particularly those who are doing fix & flip projects.  Hard money lenders can be indviduals, small partnerships, or major bank lenders.  Their interest is in higher returns than they can get from normal real estate lending, and with faster turnover.

Who needs hard money loans?

I’ve already mentioned fix & flip investors.  However, developers and anyone doing shorter term real estate projects can have reason to use a hard money lender.  Many of the most successful real estate investors are stretched when it comes to funding for the many projects they’re working at any given time.

Often these investors either do not want to use their personal credit to back a loan for liability reasons, or perhaps they’re already carrying a lot of debt and getting more the conventional way is difficult.  It’s also time-consuming.  Their interest is in having money available quickly when an opportunity presents itself.

Pros of hard money loans.

For the active investor, relationships with several hard money lenders can be a valuable asset.  Many of these lenders will issue fund guarantee letters that investors can present with offers to prove the ability to finance a deal.

You also cut through a lot of red tape with hard money loans.  The time from application to money in your hand can be as short as a couple of days.  When an investor finds that perfect deep discount bargain fix & flip that requires fast cash, this is the way to go.

Often appraisals aren’t necessary, and a deep enough discount to current market value can get you 100% funding of the purchase price.  For a fix & flip, financing the property is just one facet.  The funds to carry through with the rehab must be borrowed as well.  With the average fix & flip lasting only a few weeks to a few months from purchase to sale, hard money lenders are happy to provide financing for a quick profitable deal.

Cons of hard money loans.

Really, for an experienced investor, there aren’t any really prickly issues other than the cost of these loans.  Many of these lenders will get right up close and cozy to the state’s usury limit with interest, with 12% to 18% interest very common.

But that’s just the interest.  The loan origination and other fees can vary between one percent and as much as five percent of the amount borrowed.  If you need $100,000 for four months, you could end up with interest and fees totaling more than $7,500 to $10,000.

Of course, if you’re rehabbing a property that takes a total of $100k plus these costs to finish the project, it’s still a great deal if you’re selling it for close to $200,000.  The key is to know your market, know your costs, know your buyer and selling price, and stay within your budget and time frame for project completion.

Before committing to a hard money loan, take a hard look at your numbers from end-to-end.  If the numbers work, it’s a fast and profitable way to go.