Hard Money Loans

Warning - using hard money loans for investing in rental property is for experienced real estate investors.

So what is a hard money loan? Typically investors are always looking for ways to increase the return on their investment. Some will band together or form a company specializing in making real estate loans to investors. If an investor has financial problems, typically they take care of their house before their investment property. So investment loans are riskier and investors typically will want a better return on their investment. Thus lenders charge high fees and high interest rates. Hard money lenders are willing to invest in property that banks are not willing to lend money on - for example a property that is really poor condition.

The main advantage of hard money loans is that it will provide money for purchase as well as rehab costs up to 75% of the after renovated appraisal. If you are buying a property that requires lots of money for renovation a hard money loan is often the only recourse your have.

Hard money loans are typically short term in duration (usually 12 months). To compensate investors for their risk (that is, cover the defaults of other investors), hard money lenders will charge large upfront closing fees of anywhere from 4% of the loan amount to 8%). Some lenders will allow you the option of making no mortgage payments during the term of the loan for additional points paid at closing.

These loans are used for the highest risk real estate investment. In the past hard money lenders did not require much documentation on the financial condition of the investor and were only concerned about the quality of the property. This has changed and hard money lender will now run your credit report. Lenders also want to know how much experience you have in real estate investing and if you are a newbie this will work against you.

Hard money lenders typically require a large upfront fee to approve you for a credit line. The credit line will depend on your experience and finances to some degree. Once you are approved you will also typically have to provide a fee of 1% of your credit line every year to hold open the line of credit.

Hard money loans typically have interest rates above 10% and often 15%. If you use a hard money lender and are not going to flip real estate you need to be able to refinance as soon as the renovations are completed.

One of the advantages of using hard money is very quick closing. If you have sellers that need their money fast and are willing to provide a discount to you for that speed, a hard money lender can provide that service. When you see a "We Buy Houses" sign, it's likely that the buyers are using hard money lenders.

Hard money lenders usually require you to use a professional contractor to rehab the property so if you like to do the work yourself, this is not usually an option. Remember their objective is to turn their money over fast.

You can find hard money lenders easily by searching the web. Sometimes you might also hear a presentation by a lender at your local real estate investment club meeting.

I have used a hard money lender but found that the costs associated with them were too great for me to achieve profitability in my market. If property values are increasing rapidly or you find a bargain they may be useful. For new investors they are a great risk. Think of this as just a large credit card advance and you will see the risk to you.

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