Investing in real estate is one of the best ways to build wealth. It is also a proven method for diversifying your portfolio. When the going gets tough, you’ll be glad you have a secured asset backed by real property.
After the 2008 financial crisis, many people hesitated about buying a home or investing in real estate. As it turns out, immediately after the crash was the perfect time to buy multiple properties. As the U.S. economy got back on track, demand for housing returned in a big way.
Today, one of the biggest issues in America is a lack of housing supply. This is pushing prices higher each month.
The good news is, home prices are still affordable across many parts of the country. Demand is also rising, as low interest rates and an improving economy bring more buyers into the market.
For investors and small business owners, now is a great time to transform real estate into wealth. If you’re looking to buy property, but don’t want to make a substantial down payment, a hard money loan could be your ticket to flexible terms and greater convenience.
Hard Money Lending Explained
A hard money loan, often referred to as a bridge loan, is a short-term lending instrument that investors can use to finance a real estate project. In other words, a hard money loan is a short-term loan secured by real property.
Unlike traditional loans, obtaining a hard money loan isn’t determined by your creditworthiness. Instead, lenders look at the value of the property in determining whether to grant you the loan. Hard money lenders are especially keen on reviewing After Repair Value (ARV) of the property before deciding to finance your project.
The ARV is essentially an estimate of what the property will be worth once you’re finished renovating it.
Lenders also consider the amount of equity the borrower has invested in the property. This will be used as collateral for the loan.
Hard money loans are typically issued by private lenders as opposed to banks or credit unions. Loan terms are usually around 12 months, but can be extended to a period of 2-5 years. The loan is paid back in monthly installments of only interest or interest and some principal with a balloon payment at an agreed upon date. A balloon payment is simply a repayment of the outstanding principal sum made at the end of the term.
Hard money loans are ideal in the following circumstances:
- Fix and flip
- Land loan
- Construction loan
- Where the buyer has difficulty obtaining a traditional loan.
Red Door Capital has years of experience working with a wide assortment of private lenders. If you’re looking for hard money financing, contact us today to schedule an appointment. This is one segment of the market you definitely want to explore with a professional before moving forward.
Pros and Cons of Hard Money Lending
Like any financing option, hard money loans carry pros and cons that borrowers need to consider before pulling the trigger. The following list will give you a better idea if hard money loans are right for you.
Hard money loans carry several advantages over a conventional mortgage, including:
- Quick financing: Hard money loans are ideal for situations where the borrower needs funds quickly. In most cases, a hard money loan can be funded within a week. It can take up to 45 days to fund a conventional mortgage.
- Flexibility: Because you are dealing with a private lender, you’ll have the opportunity to negotiate your loan terms. This process is far less rigid than the one you’ll find at your local bank or credit union.
- Convenience: A hard money loan application can be wrapped up in a matter of weeks. By working with Red Door Capital, we can connect you with the private lender that is most suited to your needs.
- Collateral: Although hard money loans are usually secured by the property itself, borrowers can pledge other forms of collateral as well. Some lenders may allow you to use personal assets as collateral, giving you even more options.
- Creditworthiness: Unlike conventional loans, your credit score doesn’t make or break your application. Lenders are mostly interested in the value of the property you are looking to buy.
When it comes to hard money loans, there are two primary disadvantages:
- Higher interest rate: Hard money loans give you plenty of convenience and flexibility, but that usually comes at a higher interest rate. The rate on a hard money loan is usually between 10-15%. That’s why it’s important to work with a professional like Red Door Capital. We can help you find the most competitive interest rate on the market.
- Shorter repayment period: As we previously discussed, a hard money loan has a shorter repayment period. However, you can certainly extend the repayment period if you think it’ll take more time for the property to become profitable. After all, the lender is banking on your property turning a profit in a reasonable amount of time.
Know Your Investment Options
Are you interested in real estate investing, but aren’t sure where to start? Check out: Red Hot Housing Market Offers Unique Opportunity for Investors to learn about the different investment options available in the real estate market.
In the article, we explain various real estate investment strategies, including:
- Rental properties
- Real estate trading (i.e. fix and flip)
- Investment groups
- Real estate investment trusts (REITs)
As you’ll learn by reading this article, not all real estate investments are candidates for a hard money loan. The market is filled with both passive and active investment opportunities. The case of a fix and flip or construction project are ideal candidates for hard money financing.
To learn more about Red Door Capital’s Real Estate services, click here. We offer real estate investors professional help so they can focus on earning passive income months ahead of schedule.
Rebecca Lake (April 2, 2016). “Using Hard Money Loans for Real Estate Investments.” Investopedia.
REtipster. Hard money 101: Everything You Need To Know About Getting Started With Hard Money Loans.