Real estate is one of the most profitable investment options out there right now, especially since we’re finally seeing healthy growth after last decade’s troubles in the housing market. There are a plethora of great opportunities out there, but regretfully it “takes money to make money”.
Luckily though, and unlike most other investments, there are many different ways to finance the purchase of real estate. Out of all the options, hard money loans are a favorite among serious fix and flip investors.
What Are Hard Money Loans?
How to Quality for Hard Money
For some investors, qualifying for a hard money loan is much easier than a traditional mortgage or loan. That’s because major lenders put the most weight on an applicant’s credit score and personal assets, whereas a private money lender is more concerned with the viability of the proposed investment. In many circumstances, finding a potential investment with minimal risk and a large upside is enough on its own to get approved for hard money financing.In addition to the property you’re offering as collateral, a few other things hard money lenders look for include:
- Credentials – Everyone has to start somewhere. Hard money lenders understand this and are willing to look past a blank slate in the right situation, but having a proven track record of successful investments is one of the best ways to qualify for hard money.
- Cash – While you sometimes get hard money financing with no money down, lenders prefer you to have a financially-vested interest in your property. This lowers the chance of borrowers simply walking away at the first sign of distress.
- Credit – Much less weight is put on credit than through traditional banks, but hard money lenders still want borrowers with a history of repaying their debts. They are, however, more likely to overlook past issues accompanied by logical explanations.
- Character – Just like with a credit history, many lenders will check an applicant’s background to minimize their risk and avoid making dangerous loans.Advantages of Hard Money Loans
Drawbacks of Hard Money
Hard money loans aren’t always the perfect financial product, however. The biggest drawback is the fact that they come with higher interest rates than traditional mortgages. This is due to the additional risk taken on by private lenders, and the less stringent requirements they have compared to major banks.Hard money loans are also designed to fit short-term needs, and while this is perfect for purchasing, fixing, and flipping real estate, it is not always ideal for long-term buy and hold strategies. Loan terms normally range from six to eighteen months, and require the balance to be paid in full at the end that time. Even still, many long-term investors use hard money to purchase un-financeable homes and then refinance them later on through traditional lenders in order to satisfy the debt once renovations are completed.
Hard money loans may not be the best option for every single investment, but they do offer a practical solution in many cases where no other alternatives exist. For the fix and flip investor they can be a tremendous asset, especially on properties that traditional lenders refuse to finance. If you have found a property that you’re having a difficult time obtaining funding for, consider exploring how hard money loans can keep you from missing out on a great investment opportunity.