When you hear the words "hard money loan", most people think of expensive money for borrowers with horrible credit, foreclosure issues, bankruptcy buy outs or other such situations. Hard money lenders these days, however, are much more than that - and offer a valuable tool to keep in your tool chest when investing in real estate. Some preconceptions that people have of hard money loans are true. Rates are higher, and many hard money borrowers are individuals who simply have extremely poor credit. Times, however, have changed. These days there are many highly successful investors, and investors with excellent credit, who take advantage hard money loans. These types of loans real options for successful real estate investors who may be looking for leverage, speed and peace of mind with regards to successful funding.
What is a Hard Money Loan?
Hard money loans are loans secured by real estate. Hard money loan specialists work with a wide range of non bankable sources of funding. These can include high net worth individuals, pools of investors, hedge fund money, and other various sources. These are usually short term loans, meant to fill a need to bridge from one situation to another. They could be used to flip property, improve existing property, get a commercial property cash flowing or many other purposes. Ideally, the exit comes as a sale or a refinance. Most people do not want to stay in these loans long term, as there are better rates available on the market. These are typically interest only loans, which means payments are much lower than if the loan were amortized over the short term offered. There are some situations where a long term hard money loan is useful, however, and there are 30 and even 40 year terms that are available if the situation warrants.
The main underwriting factor for investors on hard money loans is the equity in the property. This is the main ratio used when evaluating a file – the loan to value ratio. Simply put, this is the ratio between the requested loan amount and the value of the property – either as is or as complete.
Property condition is not always a concern for hard money loans. Many loans are made on substandard properties. These are properties the banks will not lend on, and many real estate investors leverage this fact to find profitable deals. By purchasing property with a hard money loan that is not able to be financed by a bank, then rehabbing the property and reselling it, the investor has created not only value in the property, but also value in the market place. Being able to sell a property where prospective buyers can obtain bank financing is paramount to maximizing profit on a fix and flip type of deal.
Who Should Use a Hard Money Loan?
Investors needing quick funding are one demographic of hard money loan clients. Hard money can fund much faster than institutional financing generally speaking. It’s not unheard of for hard money loans to close in a matter of days. For investors looking to secure favorable purchase prices in the very competitive market of San Diego, being able to close quickly is of the upmost importance.
Investors buying properties that are in need of rehab or completion are another group that can benefit from hard money loans. Many properties in need of major repairs will not qualify for bank financing. This is one way to create equity and a competitive advantage - buy purchasing a property the general public may not be able to finance. Leveraging this advantage to secure the property, and then reselling it after repair to someone who wants to live in the property is a great way to create profit.
Finally, for those who are unable to qualify for a bank loan due to credit issues, recent foreclosures or other problems, hard money loans do offer an opportunity to finance a property.
For investors in Southern California, we have access to some exciting programs for hard money loans in San Diego and the surrounding areas. Visit us online to read more!
