Hard money lending is a great idea for financing certain transactions. Here are four reasons for it:
1.Hard money is completely legitimate
You might be thinking that this is some back alley shady deal, but hard money lending is completely legal. The lenders in this field can be individuals who lend money to borrowers as a business or LLCs, Sole Proprietorships, or S Corps. Each lender has a specific business structure, which informs their investing decisions. What makes this legal? They are only doing what a bank does, i.e., lending money to a borrower. The big difference between the two is that a traditional money lending institution will not lend you the money until its review committee has cleared you.
As long as you make sure that you are dealing with a hard money lender of good repute, you shouldn’t worry. You must not have any qualms about the legitimacy of their business. For hard money lending, what matters is your ability to repay the loan. If the lender deems you good for the money, you get your loan – it’s that simple!
Find out about other pros and cons of Hard Money Investment.
2.You can always recover your investment
This advantage is more for the investor than it is for the borrowers. Both can benefit from a hard money loan if their transaction is done smartly.
Look at this specific form of lending as a way of diversifying your investments, and you will be fine. This means not investing every penny you have. By not investing the entirety of your liquidity in a single deal, any losses that you experience will be recoverable. That’s why it is smarter for a lender to loan a borrower no more than 10% of their net worth. Instead of relegating all your savings into a deal, work out an amount that will give the borrower what they really need. This is the beauty of a hard money loan, i.e., its highly customizable in nature. Your liquid assets remain safe, which you can use in case of emergencies.
3.Hard money loans are a good deal for rehabs
Say that you are interested in borrowing and the lender quotes you a 15% interest rate with 3 points. When you do the math, you will begin to see the real value of the money you will borrow. Different repayment durations will present a different value. For instance, the duration of six months will have a value that won’t be like the one for two months. Once you have the figure, do some more math by adding other soft costs to it. Next, put in the real estate commission – which is usually 5% – to it. Finally, add holding costs, such as taxes, utilities, and maintenance – if required.
The number you see now is what the loan is actually costing you. Compare it with a duration of 12 months and pick the one that is lower. You might be done with the renovations and rehab much earlier, but this comparison will give you a chance to plan your exit strategy. Imagine if the worst happened and you remain unable to repay the loan even after six months. You will still be left with some money, which makes hard money a good source of funding for you.
As we mentioned, you shouldn’t borrow from a disreputable lender. Here are some more tips on which lenders you should avoid!
4.Hard money lending is perfect for certain investments
If you belong to these groups of people, hard money lending is ideal for you:
- Flippers who are looking to fix and flip a house within several months can forego the usual 15-year-long loan on a property. They won’t be keeping it anyway. They can simply get a hard money loan for it.
- Builders and contractors looking to buy a lot, so they can build on it. Once the construction is complete, they intend to sell the whole thing. If they take a hard money loan, they’d be able to pay it off relatively quickly.
- Real estate investors who want to snap up a killer deal on a property. But doing so requires money that they don’t have at that time. A hard money loan may be fast-tracked and is available swiftly!
If you are just beginning to invest in real estate, there is a tip for you. According to it, there is no better way of familiarizing yourself with the rules of the industry than by jumping into it. Hard money lending is the easiest way of financing your deals when you jump in!