Hard Money Loan.
Real estate investment can be a very interesting enterprise and can also make you a lot of money. Whether you are planning on purchasing houses to rent out or you intend to flip properties that you have renovated, the first thing you will need to do is raise the money to finance the initial purchase.
There are various financing options and one which many property investors choose is a hard money loan. There are various benefits to hard money loans that make them ideal for investors looking to “fix and flip” properties. If you are looking for ways to raise money for real estate investment, here is everything you need to know about hard money loans.
What are Hard Money Loans?
Hard money loans are a type of secured loan which are secured with a “hard” asset. In the case of someone who borrows a hard money loan to finance a real estate purchase, that asset will be the real estate itself. The loan experts behind NewSilver explain that while mortgages and other types of secured loans can also use a house as security, the difference with a hard money loan is that the expectation is the property will be sold quickly at a profit and the loan repaid. Hard money loans are all given by private lenders and there are no government banked providers available to borrowers.
Who Takes Out Hard Money Loans?
Hard money loans are most often taken out by people who need quick money for real estate investment. As the property market is so fast-moving, the availability of this quick cash is vital to ensure you get the best deals.
There are two mains uses of hard money loans in real estate investment:
House Flipping:
In a fix-and-flip arrangement, the goal of the real investor is to get their money back quickly so they can repay the loan. The money is used to purchase a house at short notice for a low price, do it up to make it sellable at a higher price, and then use the resale value to pay back the loan with money left over as a profit. Some investors who finance fix-and-flips with hard money loans don’t have the credit rating to borrow from a traditional lender, or their intended purchase doesn’t qualify for a traditional loan. As a hard money loan is then their only option, the interest rates and loan fees tend to be higher to account for the lender’s added risk.
Buy-and-Hold Rental
With buy-and-hold rental properties, investors often take out a hard money loan to purchase a house in the same way as if they were going to flip it. Once the house is renovated, however, they are then able to take out a traditional loan as the property now has more value, pay off the hard money loan, and then rent out the property to make money.
What are the Differences Between Hard Money Loans and Traditional Loans?
The most noticeable difference between hard money loans and more traditional loans is the period in which they are usually paid back. Hard money loans tend to be repaid with one to two years, while more traditional loans often have repayment periods over thirty years. Interest rates for hard money loans are usually 5-10% higher than those of traditional loans as they are deemed to be a higher risk for the lender. This is due to the fact that hard money loans are only secured with the property while a traditional loan will be secured by both a property and the borrower’s credit score.
What Do Borrowers Use the Money For?
A hard money loan will cover both the initial cost of the property and the money needed to fix it up. Borrowers will need to estimate the total cost of renovation in order to borrow the money which is required. This does put some limits on what renovations can be made as lenders will only give the go-ahead on home improvements which are certain to increase the property’s value. For example, a new kitchen and front yard landscaping would most likely be approved while a swimming or home cinema would not.
More and more people are getting into real estate investment as it can be so lucrative. With hard money loans being secured against investment properties, they can be a very safe way to fund investments. The important thing is to ensure that you choose the right properties and make the key renovations that will enable you to sell the properties quickly at a profit. If you are looking for ways to raise investment capital, make sure to check out hard money loans and see if they work for you.
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