What is a hard money loan?
Some of the greatest fortunes throughout the history of the United States have been made in real estate. This continues to be as true today as it was in the days of John Jacob Astor, one of the first real estate magnates whose Manhattan holdings today would have likely made him among the richest people in the world.
But even for those who are just looking to build a solid nest egg for retirement, real estate investing and various forms of development provide one of the most reliable means of achieving genuine financial independence. But this raises a serious problem for the average American. Because saving money and getting to the point where someone can even afford the smallest home is becoming ever more difficult in today’s tough globalized economy, how is anyone supposed to raise enough capital to get into a home remodeling, flipping or real estate investment project or buying a liquor store?
Hard money loans can provide the answer
In many real estate markets throughout the United States, even getting an entry-level home that could potentially be rented out now requires hundreds of thousands of dollars in investment capital. While many Americans could theoretically qualify for a mortgage, the 25 percent down payment is often a deal killer. This is especially true in markets where even lower-end properties are going in the $300,000-plus range, requiring a down payment of no less than $75,000.
But this leaves many people shut out of the real estate market, unable to have any realistic prospect of ever raising sufficient capital to get involved in their first deal. How could someone who either already possesses some rehabbing skills or who is a quick study but doesn’t have tens or hundreds of thousands of dollars lying around be able to purchase an income-producing or flappable property?
One answer is hard money loans. Hard money loans are not like bank loans, nor are they like reverse merger transactions where you can get funding from the public. They are issued by hard money lenders, who are typically local individual investors or groups of investors who specialize in lending to those carrying out promising real estate development projects. In the real estate industry, using hard money lending as a form of adjunct financing is inside baseball. Few people outside of professional circles even know what hard money lending is. And the lenders themselves like to maintain quiet, high-volume relationships rather than taking out billboards and advertising their rates as is the typical mode of operation for mortgage lenders.
But hard money lenders can be a godsend for anyone who is looking to get into the real estate business but lacks the up-front capital to do so. Hard money lenders have a number of huge advantages over banks. They are almost infinitely flexible. A hard money lender may be able to cover the entire cost of a down payment with the collateral being the underlying property. Hard money lenders may also be willing to take equity positions in projects as they are often experienced real estate investors who are expert at structuring deals and getting things done.
But one of the biggest benefits of hard money loans is that they can actually provide the necessary financing to cover the cost of repairs that need to be done to a rehab property. This means that it is often possible to structure deals where a house flipper gets to participate in most or all of the equity upside while taking on very little personal risk and requiring no or few up-front, out-of-pocket costs.
The only downside of hard money loans is that they typically charge fees in the range of 5 percent and 15 to 20 percent annual interest. However, the majority of these loans will be paid back within weeks or months.