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The Basics of Hard Money Lending

By: Elite Legacy Education, May 26, 2017

In the past, hard money lenders have cast a somewhat doubtful image upon this type of financing. Various movies have created the idea of an intimidating loan shark. The plot typically goes something like this. The loan shark hands over a briefcase of money to someone in an alleyway. The recipient of the loan is generally unable to repay it and the battle ensues. The loan shark begins harassing the recipient about repayment until they eventually receive it in full. But like I said, that’s just Hollywood. In today’s world, legitimate hard money lenders exist and they can be perfect for financing your real estate deal. And don’t worry, you won’t get beat up in the process.

 

What is a hard money loan?

 

A hard money loan is a specific type of short-term loan that is backed by an asset – typically a real estate property. These are often issued by private lenders or companies as opposed to conventional lenders like banks. Loans of this nature typically have a lifespan of up to 12 months, but there are cases where they can be extended to two to five years. It all depends on the nature of the loan and how the deal is structured.

 

How big of a loan can you expect to receive?

 

Hard money loans are often referred to as last resort loans. This is based on the assumption that people look to hard money lenders when they get turned down by a bank. Since the property is the only asset securing such a loan, you will typically get less funding in return. This is based on the ratio of the loan size compared to the value of your collateral (i.e., equity in the property). With hard money loans, you will receive a smaller loan value than you would otherwise receive from banks.

 

How much can you expect to pay for hard money loans?

 

As always, the interest rate on a loan is based on the perceived risk of a project. When it comes to hard money lenders, it is a unique situation. Since the loans are backed by the value of the property, your credit history doesn’t have much of an effect. Instead, it is based on the future value of your equity stake in the property.

 

There are two components to the fees charged on hard money loans – interest rate and points. The interest rate refers to the accumulated interest that is due alongside principal payments. In general, these will be higher than conventional loans since lenders view these projects as riskier. Expect to pay anywhere from 10 to 15% in interest, but be aware that this is just an estimate. It will fluctuate with each individual project. The second component is referred to as points. This is considered to be the loan fee and is usually required as an upfront payment. For this, expect anything from 2 to 4%, but again, this is just an estimate. Each lender will have their unique requirements which means you should do some digging to find the right deal for you.

 

When should you use a hard money lender?

 

Hard money loans can be suitable for a variety of situations. Though they differ from conventional loans in some important ways, which means they are better for certain projects. A general rule of thumb is that hard money loans can be more flexible than conventional loans. Here are some cases when this is true.

 

  • In a situation requiring a short turnaround or when there are time constraint
  • When short-term financing options are required
  • Fix and flip projects
  • Poor credit history

 

As you can see, hard money loans present an alternative means of financing when conventional loans are insufficient or unattainable. Whether it takes too long for a bank loan to be issued, or you have a poor credit history, it never hurts to explore your alternatives. Hard money loans are just one of many options out there. You can fund projects using other people’s money, with a hard money loan or with second mortgage options, to name a few.

 

There's never a shortage of money looking to back a great deal. It's simply knowing where to find it. By attending a Rich Dad Education event, you will be introduced to a variety of funding sources and our Rich Dad Education speakers will demonstrate which sources fit different types of real estate investments.

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