For those new to hard money lending, using private funds for the first time might be intimidating. Direct hard money lenders work differently from traditional banks. However, few new borrowers understand these differences. Like everything else in life, hard money lending has its pros and cons. Hard money loans are not for everyone and not everyone would qualify for them. However, working with a direct hard money lender vs. a traditional bank could offer flexibility and leverage not available anywhere else. Think about hard money lenders as a narrow subset of mortgage companies that provide a unique type of financing to borrowers in very specific circumstances.
Hard Money Lender – Hard Money Loans – Blog
Private lenders (alternatively referred to hard money lenders) are a narrow subset of mortgage companies that specialize in working with real estate investors. The financing that they offer is asset-based. As the name suggests, asset-based financing is financing that is secured against an asset or collateral. Asset-based financing has a long history that goes back to ancient times when almost anything of value could serve as collateral. In modern times, the most common assets for businesses to borrow against are accounts receivable financing, inventory financing, equipment financing, or real estate financing. Our focus is asset-based lending for real estate investors.
Much of the advice on private money loans are focused on how to get qualified for them. While it’s certainly an essential topic, an equally important subject is how to ensure your success once you obtained that funding. So, how to work with private lenders to ensure your success? Let’s face it – your ultimate goal as an investor is to maximize your profits. Repaying your private money loan as quickly as possible is a necessary milestone in meeting such a goal. By moving through your rehab efficiently, you can save thousands of dollars. In contrast, every additional month your loan is outstanding will cost you a pretty penny in carrying costs such as interest payments, taxes, and insurance. If you fail to repay a loan within a term agreed (typically twelve months), you might also incur default fees and interest. All of them would take an additional chunk out of your profits.
The real estate inventory is low in the DC area, and any real estate investment opportunity is bound to attract multiple investors’ attention. It’s not unusual for a distressed home to receive twenty or more offers. How do you keep your competitive nature in check and remain level-headed when faced with such intense competition? How do you resist that rush (or high) that real estate investors derive from being that winning offer? How do you make sure that the need for instant gratification does not cloud your judgment? The answer is in unbiased financial analysis, disciple, and perseverance.
Private money lenders offer their borrowers incredible leverage. For you as a borrower, leverage means using the other party’s funds to pay for as many expenses of buying and rehabbing a home as possible. Still, all private lenders want their borrowers to invest at least some of their own money. That helps them manage their risk by ensuring that their borrower is financially vested in the transaction. For real estate investors, the most prevalent reason to create a real estate investment partnership is to pull together enough funds to satisfy their lender’s contribution requirement. However, many of them define their partnership in loose terms without realizing the pros and cons of each scenario.
For private money lenders like us, January is the busiest month of the year. Not in terms of closings but certainly in terms of inquiries about our financing. I swear, making money in real estate must be on many folks’ new year resolution lists. As with many other new year resolutions, they tend to pitter out as time goes on. Only the most determined remain in the game and ultimately make money in real estate. So how do you make sure you are not one of those folks who are full of grandiose plans in January only to be full of excuses by Fall? Human psychology suggests that we are creatures of habit and struggle with maintaining dramatic changes to our behavior. This is exactly why so many diets fail. They call for a complete overhaul of our behavior without addressing our natural propensity to maintain the status quo.