What is Hard Money?
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. This is in contrast to a traditional bank loan which relies more heavily on the borrower’s qualifications – their credit and income. Hard money loans fill a crucial niche in the real estate industry by allowing investors to secure the funds they need without all of the red-tape involved with a traditional mortgage.
Hard money loans are known for:
- Speed (sometimes closing in as little as a week or two)
- Ease of qualifying (as long as the asset value is there and the borrower can make payments)
- 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. Hard money loans usually have interest rates between 12% and 19% with 4 to 8 % (points) origination fees. Investors, however, are generally happy to pay these short-term rates as it allows them to complete transactions they could not fund in traditional ways.
Advantages of Hard Money
- An investor can borrow 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 investor’s pocket helps stretch their investment dollars and make bigger and/or additional deals.
- An investor can buy distressed properties based on its expected value after repairs (ARV). A bank will not lend on distressed properties.
- An investor can make deals in industries that banks would have no interest in.
- Often, a hard-money lender has been in the investor’s shoes so he knows the challenges he faces.
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 - 24 months and possible renewals (fees apply)
Fix and Flips - 6 months with an automatic 3 month extension (fees apply)