When it comes to real estate investing, one word that you may often hear is “hard money loans.” A hard money loan is a loan that is given to individuals or businesses that cannot receive traditional financing due to various reasons, such as poor credit history or lack of assets. This type of loan is secured by the value of the property purchased, instead of relying solely on the creditworthiness of the borrower.
While taking out a hard money loan may seem like a good idea, it is important to understand the benefits and drawbacks before making a final decision. In this blog post, we will discuss everything you need to know about hard money loans and whether they can be a good investment for you.
The Pros of Taking a Hard Money Loan
One of the most significant advantages of a hard money loan is that it provides quick and easy access to capital. The approval process for hard money loans is usually much faster than traditional loans, taking only a few days to a few weeks. This can be a great option if you need to move quickly to secure a property or have a unique investment opportunity.
Another pro of hard money loans is that they are asset-based. This means that if you fail to repay the loan, the lender has the right to seize the collateral – the property that you purchased. For lenders, this provides a type of “insurance” that they will recoup their money if something goes wrong. As a borrower, this can be helpful since banks typically require extensive background checks, scrutinizing every financial detail of the borrower.
The Cons of Taking a Hard Money Loan
Despite the many benefits of hard money loans, there are some downsides. First, these loans have much higher interest rates than traditional loans. Typically, interest rates on hard money loans range from 7% to 12%, which can add up quickly over time.
Additionally, hard money loans don’t offer as much flexibility as traditional loans. Since the loan is subject to the property’s value, hard money lenders are not interested in the borrower’s creditworthiness, income history, or other factors. Therefore, you’ll need to ensure that you have enough equity in the property to qualify for a loan.
Another con is that these loans are usually short-term, typically lasting from six months to three years. Any extension on that time limit would incur additional interest rates on top of the existing ones.
Who Should Consider Taking a Hard Money Loan
Hard money loans are often a good option for experienced real estate investors who have a clear exit strategy and don’t need a long-term loan. They are also an option for those who have low credit scores, many financial obligations, or need fast access to capital. Another benefit is that hard money lenders do not require a costly appraisal process.
Being a new investor shouldn’t deter you from using hard money loans, however you want to make sure you are fully educated on what you are getting into. You don’t want to be blindsided or caught off guard to anything in your investing journey.
Taking a hard money loan can be a good investment if you have sufficient equity in a property, a reliable exit strategy, and a comprehensive understanding of the loan’s terms. However, if you’re unsure about the loan’s requirements and risks, it’s best to seek out an experienced financial consultant who can help you evaluate your options and make an informed decision. In short, it’s important to know your own finances and speak with the experts at FlipCo Financial about your hard money loan options. They are the leading experts in funding real estate investments nationwide.