Author: Melissa C. Martorella, Esq.
When borrowers need capital quickly, they often turn to “hard money loans.” What exactly is a hard money loan and can you become a hard money lender? Here’s what you need to know.
- A hard money loan is a loan secured by hard assets, most often real estate. Hard money loans are funded by private lenders who determine their own closing requirements. This type of financing often comes with high interest rates and short-term payback periods-which is great for investors. Typically, private lenders will consider traditional factors like credit scores, debt-to-income ratio and revenue, but ultimately, the deciding factor is the value of the collateral asset. This focus accelerates the underwriting process and offers an alternative financing option for those whom traditional financing avenues are not an option which means that you can begin making a profit on your investment quickly.
- With funding accessible in a matter of days, hard money loans are popular among real estate investors, who may need to close quickly on a property. For fix and flips, hard money loans are perfect — borrowers can access cash quickly, and the short-term maturity dates often align with renovation timelines. The short-term maturity dates are also great for investors because they can make a profit quickly, have a set deadline for repayment, and then invest in another project.
- To protect their investments, hard money lenders are usually careful about the how much they invest. The size of the principal for hard money loans is determined by a “loan-to-value ratio,” which is a percentage of the current value of the hard asset. LTV rates for hard money loans are often in the 65-75% range which is beneficial for lenders because it means that if you must foreclose your investment is secure. There is a cushion built in because the backing asset is valued more than the loan.
- Hard money lenders can get a bad rap because the loans are risky. However, this should not deter you because if a borrower cannot repay the loan, then you will repossess the collateral assets. Also, as with traditional lenders, hard money lenders charge interest and because private lenders are at greater risk, interest for hard money loans is usually high, in the 8-15% range, resulting in greater returns for your investments.
- Finding good borrowers is not as simple as it was before COVID-19, but it does not have to be difficult. Real estate brokers can be an excellent source for referrals to private lenders. If you need help preparing or negotiating a participation agreement, contact Geraci Law Firm for a consultation today by filling out our contact form here.
Key Takeaway:
Hard money loans are popular among private lenders for their fast closure and short-term maturity dates. While higher interest rates present greater risk for borrowers, savvy lenders can make profits quickly while protecting their investments because the loans are tied to hard assets including real estate. Hard money loans are a great way to make money quickly. If you are interested and would like to discuss how you can get involved as a hard money lender.