Financial Advice Blog

Many of the “real estate experts” stress the importance of using other people’s money (OPM). These “experts” say that it’s better to invest with other peoples money because then you get a greater return on your investment. In reality, if your investment really is great then you will be better off using your own money, but most of us don’t have hundreds of thousands of cash lying around. But that’s a subject for another day, this article is focused on hard money.

Hard money loans are privately funded loans that have high interest rates and high origination fees. These loans aren’t hard because they are hard to get, but because the terms of them are very “hard”. It’s not cheap to get hard money financing. They usually have high interest rates, about 10-18%, plus upfront fees from 3-5 points.

The main difference between hard money loans and traditional mortgage loans is the criteria used to determine finance worthiness. The loan worthiness for traditional financing is determined by the borrower. The lender will only loan money if the borrower has a good credit score, a low debt to income ratio, and a consistent stream of income in which they will be able to pay for the debt. With hard money loans, the main focus is on the value of the property. If the value of the property is substanitally more than the amount lent, a hard money loan will usually fianance. If the borrower is unable to pay back, they have no problem foreclosing and aquiring the property that is worth substantially less than what was paid for it.

Despite the risk, hard money loans can be very useful, especially for real estate investors. Many foreclosure auction and other deals need financing very fast. They must come up with money fast. A good hard money lender in Virginia can fund money within 48 hours. If it’s a solid investment, despite the high financing cost the buyer can still net a substantial profit. The important thing is the potential profit, not the amount spent to get that profit.

If a real estate invester borrowed 100 Grand, and sold it three months later for 140 Grand. If the up front fee was 3 points, or $3,000, plus the $6,000 in interest paid. They may have paid the hard money lender $9,000, but they still would have a profit of over $30,000.

Hard money loans can be a good tool for smart real estate investors, if they take caution and use them wisely.

Filed under: Financial Advice