June 18th, 2022 1:40 PM by Sandy Chinchar
The term “hard money” comes from metal coinage (rather than paper) but has come to mean a tangible asset.
But what is a hard money loan (sometimes called a private loan)? Most often, it's money borrowed from a private individual or pool of individuals. The borrower’s real property (tangible asset) secures that loan.
A hard money loan is almost always on an investment property for commercial purposes only. Some ask if a residential property is eligible for a hard money loan? Yes, if it's factually your investment and not used for personal reasons. You will need to state what the purpose of the loan is.
Many folks think of a hard money loan as something you only do if you are desperate for funds right now. However, this is not really the case. A hard money loan can be advantageous, but what determines that?
Sometimes it helps you avoid having to have a partner in a deal. Yes, your rate is higher, but you saved by not resorting to a business arrangement you preferred not to have. Sometimes you need a very fast loan to nail down property, and the seller knows your private loan is as good as cash.
There are different types of hard money loans.
The commonly known type of hard money loan source is mortgage brokers. Sometimes a mortgage broker lends their own money, or the broker maintains a pool of contacts, several local investors, to run your deal by. With this sort of loan, the investor will often meet with you, look you in the eye, and see if they want to invest. The deal just has to make sense to them, and they want a good feel for your project.
Another type is with an institution equivalent to a bank that mortgage brokers who do hard money (private) loans have access to. Such institutions will have set guidelines their loans must follow. Usually, a person has to put down a substantial amount of money to acquire this type of loan. Such as 30%. However, there are programs specifically meant for fix and flippers, with a higher percentage loaned on the property for those in that industry who have had successful projects.
Hard money loans are often two to three-year terms, although sometimes you can negotiate a shorter-term with a slightly higher interest rate. With private investors, supply and demand are factors. How they assess your project can also be a factor.
The plus of these loans is that they can be very fast. You need to have an exit strategy since hard money loans are meant to be a shorter-term solution.
When does it make sense? If it’s a property that you can’t get a traditional loan on because it needs a new roof, but you are a contractor, and you’ve done the math, indicating there is good profit if you can nail this property down, fast. But, finally, the answer is when it makes sense for you.