Is It Wise To Finance Real Estate Deals With Hard Money?

A lot of the “real estate investment guru’s. These “experts” say that it’s better to invest with other peoples money because then you get a greater return on your investment. In my opinion, if you don’t think a real estate investment is good enough to use your money, you probably better not ask others to invest their money. But that’s not the point of this article, today we will talk about hard money.

Privately funded loans with high interest rates and fees intended for temporary financing are known as hard money loans. 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 loans. They typically have an upfront origination fee of three to four points, plus 12-18% interest.

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. The focus of hard money lenders is the property’s lending worthiness or value. If the value of the property is substanitally more than the amount lent, a hard money loan will usually fianance. If the borrower doesn’t pay the hard money loan back, the hard money lender forecloses and now owns a property with a significant amount of equity.

Hard money loans can be useful, and can be very valuable for investing in real estate. In order for many real estate deals to happen, the invester must have the financing within a few days. They must aquire loan money quickly. A good Virginia hard money loan can be obtained within just a few days. If the property purchased really is a good real estate investment, and the buyer has a good timely exit strategy, then even though the borrowing cost may be high, the profit made is worth the cost. The important thing isn’t how much money the investor spent, but how much money the investor made.

Lets say a real estate investor borrowed $100,000 at 10% interest, flipped a property, and then sold it for $140,000 six months later. If there up front fee was three points on top of then to the interest paid. Despite paying the hard money lender nearly $10,000, the real estate investor would still have a profit of about $30,000..

Real Estate investors can benefit from hard money loans, but need to be careful with the way they use them as the costs are very high.