Is a Hard Money Loan Right for Me?

February 21, 2020 By

If you’re new to investing real estate, you’ve probably heard about hard money loans and wondered if they could assist your business. In the past, hard money loans had a bad reputation and were often thought to be a loan of last resort. In fact, hard money loans can be a valuable tool for property investors.  

What is a hard money loan?  

So, what exactly is a hard money loan? Hard money loans are funded by private investors, not banks, and are both short-term and asset-based. Here’s how they work: 

  • A borrower uses real estate assets to secure the loan.  
  • Typically, interest rates are higher since the term is short and generally higher risk.  
  • Monthly payments consist of either just interest, or interest, principal, and a balloon payment at the end of the term.  
  • The total amount of hard money that a borrower can secure is based on the value of the real estate property 
  • The borrower can use a property they already own to secure the loan, or it can be equity in the property that is being financed.  

How does a hard money loan compare to a conventional loan?  

While hard money loans are funded by private investors, a conventional loan is traditionally financed by a bank or credit union. For a conventional loan, the borrower’s credit history and standing are more critical. For a hard money loan, the value of the property is the deciding factor. As long as the investment property has enough equity and can be used as collateral, then the borrower can likely obtain a hard money loan to complete their project. Additionally, the process for acquiring a loan through a bank is long and arduous. Often, real estate investments need to be funded quickly, a borrower simply doesn’t have time to go through a bank. Hard money loans can be issued in a few days, making them an ideal option for real estate investments especially “fix-and-flip” projects. 

When should a hard money loan be used?  

Hard money loans are often sought by borrowers who have experienced a foreclosure (or have another financial reason for being turned down by banks), or for those looking for a quick approval on a short-term loan. It’s not ideal for all types of projects, like personal loans for a primary residence. However, if a borrower is seeking financing for bare land to build on and needs a short-term loan fast, then a hard money loan is ideal.  

“Fix-and-flip” projects are a great example of when a hard money loan makes sense. Borrowers in this situation will generally own the property for a short period of time, during which its value will increase. After that, they’ll sell the property and quickly repay the loan. Other potential situations include land loans, construction loans, and projects that need quick action.  

Who finances hard money loans?  

The right lender is critical. While many large institutions provide hard money loans, you’ll want to choose a lender that is affordable, fast, and reputable. Make sure to: 

  • Talk to local real estate agents and investor groups to find hard money loan recommendations. 
  • Consider smaller lenders that can be considered a partner in your project.  
  • Remember that personal investment and guidance can make all the difference in your project’s success. Local lenders tend to be knowledgeable about local trends, zoning, ordinances, building codes and market conditions, which often yields valuable insight and recommendations. 
  • Consider us! Advanced Investment Corp has been financing hard money loans across Oregon for more than 35 years, with thousands of successful projects in the Portland, Salem and Eugene areas. Our dedicated and knowledgeable team is always looking for new opportunities. Contact us today to discuss your project.