Hard Money Difference
Hard money lending is not for primary residences.
Hard money loans are business loans issued to real estate investors looking to make a profit. As such they are not subject to many regulations that apply to consumer lending.
Hard money lenders do not sell their loans to Fannie Mae or Freddie Mac.
Typically, they lend their own money or money they raise from capital investors. They decide which loans to fund based on their own risk tolerance and lending experience.
Hard money lending offers only short-term loans.
Unlike consumer loans, hard money loans are not designed to hold for fifteen or thirty years. Their typical term is between six to eighteen months before they need to be repaid either by flipping the property or refinancing it.
There are three major reasons why, without hard money lending, real estate investing would be limited to those with deep pockets.
Hard Money Advantage
Many investors wouldn’t qualify for a loan.
Some investors don’t have a high credit score or don’t show enough income to qualify for a traditional loan. Others are turned down because they already have too many mortgages. Without hard money financing these borrowers would have no choice but to sit on the sidelines and watch other people make money.
Many properties would not qualify for financing.
Other lenders base their loans on the current condition of the property. With few exceptions, they lend to consumers, not rehabbers, so they require a property to be “livable” right away. They don’t want to lend on properties that are damaged, trashed or don’t have a functioning kitchen or bathrooms. Hard money lenders focus on the property’s potential or what it can be once an investor finishes up the rehab.
No ability to compete with cash offers.
A great investment opportunity often comes with a seller who needs to close fast. An all-cash offer is hard to compete with – unless you are working with a hard money lender. Because of their speed, hard money loans are widely considered equivalent to all-cash offers.
Hard Money Advantage
Hard money lending offers lower cost of capital than a partner.
Another reason real estate investors use hard money lending is to avoid splitting profits with partners. Hey, we aren’t against partners. A great partner can provide a different perspective and offer funds or skills you might not have. But when it comes to real estate investing, the mantra is Control Thy Costs, and even a good partner costs a lot. If you feel you have enough expertise, time and discipline to make it on your own, but are held back by the lack of funds, no problem. Hard money lending will supply you with a capital at a fraction of what your partner has been costing you. You keep 100% of profits.
Like everything else, hard money lenders come in different shapes and forms.
Hard money lending might be a niche industry, but it encompasses many different players. They range from private individuals with finite amount of money to lend to large firms called institutional investors looking to park their expansive portfolios. Others might not have their own money to lend and will broker your business for an additional fee. While each type of those firms has its own pluses and minuses, we believe that working with a private hard money lender that is direct and local offers the best of both worlds.