Often times investors, especially beginners have trouble with getting their deals financed traditionally and this is where hard money lenders come in. This article will explain some general principles in regards to hard money lenders and hopefully will help you to understand what it entails.
Should You Use Hard Money Lenders To Invest in Real Estate?st in real estate
1. Should You Use Hard Money Lenders To Invest in Real
Estate?
by mrcharls | on April 16, 2013
Often times investors, especially beginners have trouble with getting their deals financed
traditionally and this is where hard money lenders come in. This article will explain some
general principles in regards to hard money lenders and hopefully will help you to understand
what it entails.
Hard Money Lenders 101
Hard money lenders provide short-term loans to individuals purchasing residential or
commercial real estate and do not use conventional standards to extend credit to borrowers.
So the next question should be what is soft money…well soft money is usually easier to qualify
for and the terms are more flexible and is considered to be more of traditional financing
from banks or credit unions.
Hard money or private money as some call it, has many more restrictions however in many cases
it’s much easier to get because you are dealing with individuals instead of traditional lending
institutions.
The terms will vary from hard money lenders because each hard money lender has their own set
of requirements that the borrower must meet however in most cases they lend a certain % of the
fair market value of the property and if the loan defaults they take possession of it.
As I said earlier, all hard money lenders are not the same so there may be additional
requirements when applying for the loan so be sure to read all the fine print and do not rush to
sign anything before having a complete understanding of the process.
Note Make sure you know what the terms are when dealing with hard money lenders so you
can find the one that will fit your needs
Typical Terms of Hard Money Lenders
A key word you will always hear is ARV which simply means after repair value, this is the price
the house is worth once all the repairs and updates have been made. Most hard money lenders
usually will loan up to 70% of the ARV, so for example if a house is worth $100,000 ARV the
private lender will loan you up to $70,000 or 70% of the after repaired value.
One thing you will notice about hard money lenders is the high interest rates and the short terms
of the loan which is usually anywhere from 6 months to a couple of years depending on what
strategy the investor is using. The interest rates will usually be between 10 – 20% annually and
you will more than likely have to have some up front cash (2-10%) to acquire the loan.
2. Hard money lenders gives investors the ability to get money very quickly and in many cases this
is the difference between if they get the property or not because traditional financing will take
longer and in today’s real estate investing world you have to move fast, because deals come and
deals go!
There can also be pre-payment penalties so be very cautious of these penalties because they can
really cut into your bottom line. Not all hard money lenders are the same and some do not
charge these penalties so shop around and be sure to ask questions before choosing a hard money
lender.
Many hard money lenders don’t require you to provide all the information that a traditional
lender would such as tax returns, bank statements etc because they use the property to protect
their loan and if the person by chance defaults, private lenders gets the property and can make a
handsome profit reselling it, as said before it’s all about the private lenders requirements and
what they choose to ask for.
Choosing hard money lenders is a creative way to finance a property and there are countless hard
money lenders waiting to lend you money. To find them is not very hard…especially with
today’s technology.
I hope this article provided you with some information that will help you to make an informed
decision if you choose to use hard money lenders as part of your investing strategies.
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P.S. Be sure to read all the hard money lenders fine print!