Real Estate Investing Dictionary
A “hard money loan” is asset-based, meaning the loan is considered primarily on the value of the hard asset (usually real estate) collateralizing it. Traditional bank loans rely more heavily on the borrower’s qualifications – their credit and income.
A hard-money loan has many advantages for the borrower needing a short-term loan for a construction, fix and flip, land development, fix and hold, or other bridge loan. Because hard money loans allow borrowers to secure the funds they need without all of the red tape involved with a traditional mortgage, hard money loans fill a crucial niche in the real estate industry.
Advantages of Hard Money Loans:
- Speed - deals can be closed in as little time as 1-2 weeks
- Ease of qualifying
- Little or no down payment required
- A ready source of capital
- Flexibility – the borrower usually works face to face with the lender
All of this, of course, comes with a cost. Usually, hard money loans have interest rates between 12% and 19% with 4 to 8 points origination fees. Borrowers, however, are generally happy to pay these short-term rates as it allows them to complete transactions they could not fund in traditional ways.
Hard money loans vs. Traditional loans:
- A borrower can get up to 100% of the funds needed for the asset they are purchasing and repairs if the value of the asset warrants it. A bank will usually only lend on the purchase price of the asset which can be much lower.
- Keeping the cash in the borrower or developer’s pocket helps stretch their investment dollars and make bigger and/or additional deals.
- A borrower can buy distressed properties based on its expected value after repairs (ARV). A bank will not lend on distressed properties.
- A borrower can make deals in industries that banks would have no interest in.
- Often, a hard money lender has been in the borrower’s shoes so they know the challenges of borrowing and developing.
Hard Money Loans vs. Private Lending
So what’s the difference between a private money lender and a hard money lender? A private lender lends his own money, while a hard money lender also raises capital from a variety of sources. Sometimes a private lender’s terms will be more favorable due to their lower overhead.
The risk can be that a private lender may not have available funds when you need them, while a hard money lender has access to more capital and should be able to fund almost any deal. The last thing you want is to lose a deal when your private lender can’t perform. Bottom line: make sure whoever you choose to fund your deals, that the funds will be available at closing when you need them!
Hard Money Lending With The Investor’s Source
With The Investor’s Source, you can get started investing in real estate quickly and easily with hard money lending. It’s generally easier to qualify to be a hard money lender, and borrowers and lenders work more closely with hard money lending.
Unlike many private money lenders, The Investor’s Source works with every borrower to structure a loan to meet their unique requirements. Thus, rates and terms might differ on each loan. A range for each is provided below.
- Interest Rate – 12% - 15% depending on the location of the property and the term of the loan
- Down Payment – 0 to 20% based on the appraised ARV of the property and your experience level
- Origination Fee – 4 - 5 points (5 points for loans closing in less than 8 business days after application & docs received and/or the property located in a rural area or beyond Colorado Springs)
- Loan-to-Value – 65% - 70% of the ARV
- Term – Buy and Holds - 12 months and possible renewals (fees apply)
- Fix and Flips - 6 months with an automatic 3 month extension (fees apply)