You may have heard of people in real estate making money by flipping houses. Real estate investors often use other people’s money to fund their deals. To put it simply, real estate investors acquire hard money to fund rehabs, short sales, and wholesale deals. These kinds of loans speed up the whole process of investing and cut through gobs of red tape. It is nice to know, for short-term flips, rehabs, or initial purchases, this can be a very effective option.
Raise Property Value?
It is nice to know that with this kind of loan, you can borrow up to 100% of your purchasing price! Some investors use hard money to get into the property and then do some quick fixes to raise the property value. The next step is typically that the investor gets a new loan (based on the property’s improved value) from a bank to pay off the lender.
What About Getting The Money?
You may like to know that if you can’t get a standard mortgage and buy a property and turn it quickly at a huge profit, then it could be a good idea for you to acquire a local hard-money lender. The thing you need to understand is that these lenders will frequently require you to back up your loan with real assets.
How Much Does it Cost?
The crazy thing is, if you can develop a relationship with a hard-money lender, you can get funds within a few days—sometimes money comes with no appraisal or other costs (except for origination fees of course). You need to be aware however, that these loans cost (percentage-wise) much more than an average cost of a mortgage—often in addition to high origination fees even up to twice as much as a regular mortgage.
This is something you need to know: the typical lender will charge right around the usury rate. Every state has a Usury Limit (the maximum legal interest rate). When creating a loan agreement, make sure to check the usury limit for the state in which your loan is being made. What you need to be aware of is that your loan’s interest rate should not exceed the state’s usury limit. For example, in Texas its 18% annual, so most lenders will charge 5% origination and 13% interest on a 1 year note or no points upfront and 18% interest with a shorter call.
What is a Hard Money Lender?
Basically, Hard Money Lenders are private individuals or small groups that lend money based on the property you are buying. It is great to know that this kind of lending is not dependent on your credit score at all.
You also need to know that different hard money lenders have different requirements and protocols depending on the state and locality.
Moving right along…
The advantages of this kind of Investing:
- You can receive funding within a matter of days (typically about 7-14 days) rather than 30 days+
- You deal directly with an individual lender.
- The loan is normally not based on your credit score (especially with local lenders) or at least not on your credit worthiness (assets and income.)
- You can get a loan on any piece of real estate you find even if it is run down.
- If the lender agrees with the loan—it is yours. It’s that simple.
- Hard Money is often more advantageous. You don’t have to go through an entire processing team, loan committee or underwriting process.