Lending money through hard money loans is the quickest way of borrowing money, especially when traditional methods fail to deliver you funds in a short time. Investors who look for funds for real estate investment often find it difficult to get loans from banks, particularly when they are lending money for large infrastructures. Since you get the move in the shortest time, investors have a relatively greater chance of acquiring the asset than their competitors. This makes it the first choice of real estate investors for borrowing loans.
Let us first discuss what Hard Money Loan is and what are its pros and cons:
Conventional methods of getting loans from banks and government entities require document proofing and a good credit score with a running income. This evaluation of documents and creditworthiness is done to ensure that lenders repay the borrowed amount comfortably. Banks and govt. Agencies provide loans at a shallow interest rate but require a lot of document proofing before approval of mortgage loans. All this can take months to approve and lend money to the investors. To avoid this painful method of loan, Hard Money loans come to the rescue. When investors require a quick loan without any paperwork, hard money lenders provide them the money based on the assets they have as collateral. These loans are short-term loans given on higher interest to help real estate developers and investors to acquire property and bankroll expenses associated with their real estate projects. This helps them to remain solvent, liquid and increases their chances of acquiring the property. It should be taken for real estate investing only and not for private residences as the risk is high for private projects. Hard money loans are provided by private money lenders and individuals. But like every method of financing, hard money loans also have their pros and cons.
There are many advantages of getting hard money loans that make it appropriate for real estate investors.
Where traditional methods of loans can take up to 6 months, hard money loans can borrow you money in few days only. Hard money is given to the investor in return for the property you own. The bigger the collateral’s value quicker will be the process of borrowing money. No documentation or reviewing of bank accounts needed for loans. This is what makes it quick and fast delivery of money.
Another benefit of hard money lending is the flexibility to pay back the borrowed amount to the lenders. There is no fixed schedule of payment, and the agreements are flexible based on mutual understanding and trust between the lender and investor. It can even depend on the financial situation of the investor, and he may be able to tweak the payment schedule.
It is difficult to get approval for loans using traditional methods that requires a long list of documentation for standard residential mortgages. Hard money loans are the finest way of acquiring loans for short-term borrowing where no approval is needed.
Although it seems easy and simple to borrow loans using collateral, hard money has some drawbacks as well:
1. High-Interest Rates
The least likable thing in the hard money loan is its high-interest rates which are usually 2-3 times higher than the bank rates. This can cost you a big payback amount if you extend the payment schedule. This makes it an expensive method of lending money.
2. Short time frame makes it risky
If the loaned amount is not repaid in the scheduled time due to any delays, you may face a cash crisis and need to sell another asset or sell the collateral asset for which you have received the loan amount.
So, when there are so many risks involved, what does it make necessary to get hard money loans. So, the right advice would be that when you buy a distressed property and renovate it to a higher amount than the loaned amount, it can be a fruitful business for real estate developers. This method of borrowing is best for those who buy a property in cash for a reduced value and then fix it to sell it at a higher price. Therefore your business plan must be solid in order to pay back the loan amount to the lenders and make a profit too.