Hard money is also known as private or peer-to-peer lending. When you need to access a large amount of money quickly and traditional lenders may not be an option, then hard money can be an alternative. Hard money is a way of borrowing based on collateral, that is, your property. It comes from investors or individuals who are concerned about the value of the property rather than your current financial position. Their confidence is based on the fact that if you default on the money you are, they can recoup that money by taking your property and selling it.
Why Choose Hard Money Rather Than a Traditional Lender?
If you approach a bank or lending institution to get a loan, then it’s usually a long and arduous process. You need to prove that you can repay the loan and lenders will examine your credit score and your income, plus your history of borrowing and any other loans that you have.
If your income is difficult to verify to the lenders satisfaction, then you will be refused. Even if your credit rating is great and you have a good salary, if there’s anything in your credit reports that is a cause for alarm, the process will be lengthened as they ask for further proof and supporting documentation before they approve the loan. For some people, either the length of the process isn’t an option, or they simply know that they won’t be approved by going via normal routes of lending.
Hard money lenders aren’t the same as banks or traditional lenders; their interest rates are higher, and their loans are generally shorter, but if you have good collateral and need the loan fast, then this approach could be the right answer for you.
This is great for fast-moving real estate deals, and it’s also good when you build a relationship with the lender, as they will evaluate your request quickly and painlessly, whereas traditional lenders are bound by too many regulations to act this way.
So, what else do you need to know?
Facts on Hard Money
To those who aren’t experienced in fast-moving transactions, hard money may seem like it’s operating outside the law, but that’s simply not the case. It’s simply an alternative to traditional lending and operates as a business.
They do what banks do in that they lend money; however, they aren’t subject to the same regulations. Hard money lenders can be run as sole proprietorships, corporations, or LLC’s and they will have a proper structure and strategy in place. The difference is that they finance quickly, and they don’t have the strict regulations that conventional lenders do.
These loans are generally short-term loans and because their rates are higher than conventional lenders, they are meant for short-term projects. One area where hard money is popular for individuals is in financing their children through their studies. Many prominent universities in the country offer hard money loans to students.
Hard Money Makes the Business World Go Round
Many businesses do business with hard money. Sometimes the world of business moves too fast for traditional lenders to keep up, particularly with start-ups that may not be recognised properly yet or have the longevity and reputation to justify a bank giving them a huge loan.
Just because a bank doesn’t give a business a loan doesn’t mean that they business isn’t bankable—it simply means that the bank can’t give the loan under their tight rules and regulations. Businesses turn to hard money for all kinds of financing, from purchasing capital equipment to refurbishing their office space.
Rates are High, and Terms are Short
Hard money lenders are aware that those who approach them for a loan can’t borrow money from traditional lenders for various reasons. They don’t care about credit because they collect money from the high interest rates and if the loan is defaulted on, then they can seize the property that was offered as collateral. Also, hard money loans are generally short term—between 1-5 years—which works for those they service as they operate in fast-moving environments.
Your Assets Are Your Collateral
The “hard” in hard money means the asset. When you borrow money from a hard money lender, you are securing the loan with a real estate asset. Hard money lenders don’t make decisions based on credit: they make the decision based on the value of your asset, which is why it’s often used in real estate.
It Can Be Profitable
Hard money is not for the faint of heart, nor the disorganised! You need to have a plan, particularly since you need to protect your asset and need to ensure that you are borrowing the money for good reason.
Calculate your costs and the profit from your investment and see if it’s worth it. Knowing exactly how much you need, including your repayments, will save you from borrowing too much or too little. Being transparent and building a good relationship with your lender can also lead to more profits as they will become more flexible and understand how you work in the long run.
The key benefits of hard money are that it’s quicker than traditional loans and you have more flexibility; however, there are also some drawbacks. Hard money loans are expensive, so if you can’t make a profit quickly, the interest rates could become crippling.
You’re using your property as insurance, so if you don’t know what you’re doing, you could well end up without a roof over your head. It makes sense if you’re flipping property; it doesn’t make sense to bet your house on a never-never project.
In the digital age the best and more trustworthy hard money lenders online. If you’re new to real estate investment, it can be a good way to get ahead in a fast-moving environment. Arm yourself with the facts and get a hard money loan today to help grow your business or help your real estate investment.