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Hard Money Loans Explained. How to Invest in Real Estate

Hard Money Loans for Investing in Real Estate Guide

By | 2020-01-08T15:49:10+00:00 March 21st, 2017|Hard Money Blogs|Comments Off on Hard Money Loans for Investing in Real Estate Guide

Hard money loans explained: A hard money loan is short-term loan for individuals purchasing residential or commercial real estate. These individual generally flip the properties in order to make a profit. Because the hard money loan process is significantly shorter than that of a traditional loan, investors use hard money to acquire investment properties quickly.

Hard money lenders to do not use the same strict set of criteria traditional lenders use when extending credit to borrowers.

What makes hard money loans so popular with real estate investors is that the hard money loan can be in the hands of the borrower in a matter of days. Hard money lenders can provide finances quickly because the loans are funded either with their own funds or by private investors. Considering there is less paperwork and red tape, the loan can be approved quickly.

When it comes to investments, diversification is a good way to make a profit. Using hard money loans for real estate investments can help diversify your portfolio. Here’s what you should consider:

  • LTV: Since property serves as collateral in the case of hard money loans, LTV is very important to investors. It is important that the borrower do research on the property in order to find the market value of the property and the cost for any repairs or maintenance.
  • Diversify: There are many different types of property to invest in with a hard money loan whether it’s residential, commercial, a rental property. You can choose to invest in luxury real estate or a smaller property.
  • Collateral: The property serves as collateral and the investor takes possession of the property in the case of a default on the loan. This is to provide security for the investor. If the payments are paid on time and the loan is repaid, there is no risk of losing the property.
  • Terms: Another great aspect of hard money loans is the flexibility. It is up to the borrower and investor to agree upon the terms, payment, and penalties. Flexibility is something that you don’t get with traditional bank loans.

What type of investors choose hard money loans and why? In the section below you can find info specifically on the type of investors who seek direct loans.

Investing in real estate is always a good idea but there are many different ways to invest. There are many real estate investors who recommend using hard money loans in your investment projects.

These loans are generally given to individuals who flip the properties in order to make a profit. Hard money loans are also available for land purchases. Because the hard money loan process is significantly shorter than that of a traditional loan, investors use hard money to begin your real estate investment quickly.

According to Connected Investors, here are the types of individuals who use hard money loans.

  • New real estate investors who can’t demonstrate enough income or cash reserves for a bank to qualify them
  • Investors with poor credit, undocumented income or a short work history
  • Experienced investors with more than 4 mortgages in their name
  • Investors buying properties that need significant repairs
  • Buyers who need renovation funding, not just purchase funds
  • Investors who don’t have the cash required to close with a conventional loan
  • Real estate investors who are highly leveraged elsewhere
  • Buyers of properties that won’t appraise as-is for an acceptable value
  • Buyers dealing with distressed sales that must close in days, not weeks
  • Buyers of rental properties that are under-rented, in need of repair or otherwise problematic
  • Property owners with high equity who need quick access to cash for any reason

Below are a few common questions people ask about money lenders and the process:

How do you approach a hard money lender?

Before you go to a hard money lender and ask for a loan, you will need to do plenty of research beforehand. You will definitely not be approved for a loan if you haven’t done any research on the property or know the numbers. As long as you go the lender, make sure that you have your entire project mapped out so that the lenders know that you’re serious about the loan. This will help your chances of being approved especially if this is your first project or your first hard money loan.

Are hard money lenders worried about credit scores?

Short answer: No. Long answer: The reason why hard money loans are so popular is because hard money lenders don’t look at credit, they only look at the assets. How it works is that you get a loan from a private investor and the property that you are purchasing (or any properties you have in your position) can be used as collateral.

What is the average interest rate you can expect?

Hard money lenders normally generating their income from points they charge during the escrow process. Income can be generated also from the interest rate being charged on the mortgage, so the hard money lender will charge 11% on the loan and the trust deed investor will get 10%- In this scenario the hard money lender makes 1% spread. Rates are normally between 8%- 12%, points start at 2.5 from the loan amount.
Questions on how can you protect yourself while taking out a direct hard money loan.

How to protect you. Or put another way how to minimize the risk in obtaining private loans?

There are various options.

Firstly, investigate all precedents of the hard money lender. Considerations include: What is his website like? Do his online conditions repeat his verbal ones or do they differ in one or more aspects? Are his guidelines consistent or do they contradict? Do you see gaps – any hidden conditions? What’s his social media like? Of course, the lender doesn’t need a striking Twitter, or Facebook page and these may even – and with good sense – be deemed superficial and unnecessary but what about his LinkedIn image? Is this professional and resonant with his career? How about his references? What do his clients say?
And talking about clients, it can help you to ask him whether he has offered similar loans to

others. Likely, he won’t give you names but you can at least evaluate his experience. Other things to look for are his qualifications. Decent hard money lenders in California should show you their state licensures.

Many are also licensed through the National Mortgage Licensing System (NMLS). Borrowers should verify the lenders license through the NMLS in order to prevent problems at closing, as many states require the lender’s license number to be listed on the loan documents.

Research on the internet or at the county court house to see how many properties that lender or investor has foreclosed upon. Avoid lenders with a large number of foreclosures.  High foreclosure rates could signal unscrupulous lending practices or at least a very low threshold of patience for delinquent payments.

The consumer bureau may run more on him.

This is your money that you’re talking about. You may want to dip him under the most thorough review that you can. After all, he’ll do the same to you.

Finally, don’t get a private hard money loan if you can’t afford it. This seems commonsensical but you may be surprised at the amount of people who fall into this pit! Too many borrowers believe that the future is better than the present and will right itself for them. Only: for many it doesn’t.

Some hard money lenders do trap people into thinking that ‘things will work out’. Maybe. Maybe not. How is your income at the moment? Are you making enough to afford repayment? And do you have a safe pocket for emergencies? What if the market turns – will you be able to grope your way out? Are you convinced that the property is worth the risk? Have you had it evaluated by an expert?

Unfortunately, only those with clinking pockets can usually afford the high costs of hard money loans. Rarely those with no money, poor FICO and lamentable or nil experience in real estate. Wish it were otherwise and hope you fall into that category. You may want to take a drug-free hard look at that account of yours before you find yourself tipping from skewer into flame.

Borrowers are also less apt to be sucked in by dishonest traders and more apt to succeed when they approach their lender with wrapped-up data about their property. This includes but is not limited to: an executed contract with the seller of the property, a budget and preferably a bid for the repairs needed, comparables showing the After Repair Value (ARV) of the property, a survey (land only), and an appraisal.

All too often I have seen hard money lenders advise clients to approach this as a business deal or interview. This may sound intimidating but it is not far from wrong. After all, this may be your once-in-a-years chance to persuade a prospective lender that you have an investment that he would delight in.

You are selling him something. Your property is profitable and once repaired could bring him millions in cash. Invert it that way and you may feel more confident. You are less the beggar than the giver.

In short, hard money loans are not without risk. You can minimize them with a little diligence. Hopefully, you’ll profit from your pains.

About the Author:

Yanni Raz is The Founder and CEO of HML Investments, with over 15 years in the real estate and hard money lending industry, Yanni is an expert in real estate investing, trust deed investments and more.