Exotic Wisdom | Can A Hard Money Loan Work For You?

Can A Hard Money Loan Work For You?

Whether or not to get a hard money loan is the question many investors ask themselves at one time or another.  As an investor, it is important to know all of the options available to you.  Hard money loans have their pros and con’s, here are some of each.

Before we get into the specifics, it is important to know who typically uses these types of loans.  Real estate investing is the primary arena in which these types of loans are issued.  Occasionally other types of investments could be purchased with hard money but typically residential and commercial real estate investors are the ones who use them most.

What is a hard money loan exactly?

A hard money loan is usually a short term, high interest rate loan procured for the purpose of purchasing real estate.  Usually, the property itself is put up as collateral to secure the loan.  It is possible to use other properties in what is known as a blanket mortgage to secure the loan depending on several factors such as, previous dealings with the lender, total assets, size of your portfolio etc.

Since hard money loans are high interest, why would I ever want one?

There are many reasons why one would want to use this type of highly collateralized, high interest loan.  Imagine if you had the deal of a lifetime but you had no money and you couldn’t get any more loans through a typical bank because your indebtedness with your current portfolio didn’t allow it.  What if you could use the super deal itself as the collateral necessary to obtain it?  Imagine if you procured the deal, had a buyer for the property waiting, but you simply could not make the deal go through because the seller wants you to give him a certain amount of cash down.

The buyer has never dealt with you before so he won’t give you the cash.  Your only option may be to get a residential hard money loan.  The interest could be extraordinarily high but you don’t care because the deal will be done in a matter of days.  This is just one scenario; the point is that there are times when a traditional bank will take way too long to do the deal.  The other good thing is that you could do these types of deals all day long, even if you have bad credit.  As long as you have a good deal, and preferably someone else or even several other potential buyers then you are set.

This is one way many of the gurus in real estate investing buy properties with no money down.  The thing is that this is not a beginner strategy.  You really need to know what you’re doing before you jump into this level of investing.  Make sure you know all of the things that can go wrong not just the best case scenario which brings me to the next point.

The pitfalls of hard money loans:

This is definitely not for the beginner, “weekend warrior”, real estate investor.  You really need to have experience in finding good deals, selling properties quickly, and dealing with all of the legal aspects of the contracts before you mess with a residential hard money loan.

Here are some things you should have in place before you consider these types of loans.  As you gain experience and knowledge you will slowly build a team.

1.    It’s good to have several real estate agents working with you that are familiar with you and your work.  They should always be on the lookout for you and be helping you find the exact type of deals you are looking for.

2.    It is a great idea to have a whole host of people (the more the merrier) that can and will buy a good deal from you if you find one.  This way you will be able to offload your properties quickly, time is of the essence with hard money.

3.    Have a real estate lawyer handy.  There are many cases where you might need a quick contract on the fly, or maybe there are some legal questions you need answered before you can make a deal.  It’s good to be able to have all of your ducks in a row when it comes time to close a deal; no one aspect should hold you back.

What are hard money commercial loans?

These don’t vary a great deal from a typical hard money loan except that the interest rates might be even higher.  The reason is that there is even more risk for the lender in a hard money commercial loan.  The other issue is, if they have to get rid of the property it will take longer in most cases.

This is just one more tool in the chest of real estate investor tricks.  If you have experience, a great team you can rely on, and people that are always looking for a great deal then a hard money loan might be in your future.

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