While the real estate market goes through regular upheavals that change the way people buy and sell homes, there’s always activity in the rental property market. Investors who are looking to buy up properties suitable for rent often rely on hard money loans to secure the capital required to rehabilitate their new acquisition. If you’d like to learn what sets hard money loans apart from conventional investor loans, simply read on.
Hard Money Loans Defined
Hard money loans are asset-backed loans, meaning they require collateral in the form of real estate like a conventional loan or mortgage. Lenders who offer hard money loans offer very different terms from conventional lenders like banks, and these terms are ideally suited for the use of certain real estate investors.
A hard money loan typically has a much shorter term than an investor loan, usually a year or two at most. Lenders also set a cap on the total amount they’re willing to lend which is usually a fraction of the the collateral property’s highest possible value. (60 to 70 percent is typical.) As you might expect from these features, hard money loans usually have higher interest rates than conventional loans.
How Hard Money Is Used
The primary use of hard money in the world of real estate investing is to rehabilitate distressed properties generally found at auction. Small-scale investors often push their financial resources close to their limits in acquiring new properties and may find themselves unable to foot the bill for the repair work necessary to put a distressed property back on the rental market. Hard money lenders in Phoenix cater to this need by providing sufficient cash to turn the property into a profit-generating asset.
The single feature which makes hard money loans attractive to lenders is the limitation of risk imposed by the cap placed on the total amount of the loan. This ensures that the lender will be able to recoup his investment if the borrower defaults.
Benefits And Drawbacks Of Hard Money
For many real estate investors, hard money loans are invaluable tools. They provide capital infusions when they are most needed. They move much more quickly than conventional loans, allowing the borrower to proceed immediately into repairs and renovations. The reduced valuation of a hard money loan is rarely a problem for an owner rehabilitating a rental property, and the rental income that starts coming in makes the loan easy to pay off.
Hard money loans are not without their risks, though. Private lenders who handle hard money loans are far less regulated than conventional lenders. This makes predatory lending a real hazard, and investors need to research their lenders carefully before making any financial commitments to them. Hard money loans are often sold and re-sold to new lenders, many of whom will alter the terms of the loan to the borrower’s detriment.
As you can see, a hard money loan is a very different form of lending when compared to conventional loans. It places a great deal of risk on the borrower, but many real estate investors are more than willing to assume that risk to get the money they need.