Should Hard Money Loans Be Used For Real Estate Investing?
Many of the so called real estate “gurus” out there preach the value of using OPM (other people’s money). In their view, the best real estate investment is one where the direct risk isn’t on you. 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. Anyways, that’s a different subject, this article is focused on the wisdom of using 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”. Hard money loans aren’t received without their cost. They usually have an upfront origination fee of 3 to 5 percent, and double digit interest rates.
The primary difference between hard money lending, and other types of lending, is the subject criteria. The focus on traditional mortgage loans is the borrower. Traditional lenders only approve borrowers with good credit, low debt, and consistent income. Hard money lenders place their emphasis on the value of the real estate. If the value of the property is substanitally more than the amount lent, a hard money loan will usually fianance. If the borrower happens to default, the hard money lender doesn’t have a problem foreclosing on a property with substantial equity.
There is a place for hard money loans, and they can be a valuable means for making real estate deals happen. Many foreclosure auction and other deals need financing very fast. They have to finance the property in a matter of days. Good hard money lenders in California can provide financing within just a few days. If the property is a good investment, and there’s a solid exit strategy, then even though the borrowing cost may be high, the profit made is worth the cost. The important factor is the net profit, not the costs spent.
If an investor borrowed $100,000 from a hard money lender at 20% interest, and sold it three months later for $140,000. If the up front fee was 3 points, or $3,000, plus the $6,000 in interest paid. Despite paying the hard money lender nearly $10,000, the real estate investor would still have a profit of about $30,000..
Hard money loans can be a good tool for smart real estate investors, if they take caution and use them wisely.
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