If you invest in real estate, you’ve probably heard the term “hard money”. But what, exactly, is the difference between hard money and any other type of funding?
In fact, what are some of the various types of funding for your real estate deals?
- Traditional bank or lending institution – only loan for a limited number of deals before they cut you off. Many will not loan on investment properties at all.
- Your own personal money – which most of us can go through quickly! Besides, it’s best to keep your personal money to live on and use for your personal and business expenses.
- Private money – comes from friends, family, even strangers who have money to lend for real estate. The problem with private money is that it’s often not available when you need it and you never want to miss a deal for lack of funds!
- Hard money:
- To begin with, I don’t know why it’s called hard money because it’s actually so simple: short term funding secured by your property.
- Hard money is great for fix-and-flip properties as these loans are typically for only 3 to 9 months. Perfect if you’re planning to wholesale or renovate and resell quickly. Bank loans are 15-30 years or more.
- Hard money lenders understand ARV (after repaired value) and will consider your planned repairs when lending. Banks, on the other hand, only consider current property condition when lending.
- Hard money loans cover both the purchase price and cost of the rehab. Banks, on the other hand, require the property to meet specific underwriting requirements. It may cost a great deal to bring the property up to the condition necessary to meet those requirements before the property qualifies for their loan.
- Hard money loans are faster than a traditional lender, usually only two weeks, because their requirements are less.
- Hard money lenders typically charge points plus interest. Because the loan is for such a short time, lenders would not make enough without charging points. Points are basically interest up front. Because the loan is for such a short time interest is not much of a concern but points are something you need to pay attention to, especially how often they are recharged.
- Hard money is not good for long term holds. Fees for hard money are based on a certain time frame. If you need an extension, you may be charged the points again which can dramatically reduce your profit.
- To keep your personal funds for running your business
- Hard money covers your cost of both purchase and rehab
- Increases your return-on-investment
- Minimizes your out of pocket expense
- Hard money is faster & requires fewer qualifications than conventional loans
- Hard money allows you to compete for more deals – because it’s
- Always there when you need it!
I am a hard money lender and I’m curious, do you use hard money? What’s been your experience?