Hard money – find answers to the most frequently asked questions about hard money and find a list of hard money lenders near you.
Where does the money come from for a hard money loan?
The funds originate from private investors who are looking to make hard money loans seeking a return on their capital. The source could range from:
- One individual,
- A group where each investor fractionally invests in your hard money real estate loan, or
- A group of private investors who have already pooled their funds and work with a commercial lending asset manager or loan broker to issue loans to qualified borrowers.
When is the best time to use hard money?
A borrower may consider a hard money loan instead of a traditional bank lender in scenarios or a project where having access to capital quickly is crucial. However, gaining access to this type of capital comes at a higher cost, for a two main reasons:
- The investor providing the loan is looking for a better return than they can get in the bond market or in a savings account.
- The more risk the investor takes, the higher the interest rate will be for the project. So a 20% loan-to-value (LTV) loan on a fully rented commercial building would be far less risky than a residential rehab loan on a 60% LTV fixer upper purchased at a foreclosure sale.
But remember, everything is negotiable and it is ultimately up to the hard money lender to find an investor willing to accept the risk of the borrower’s project.
Why do I feel hard money lenders can considered to be “shady”?
You’re not alone in feeling this way. Over the years, there have been many bad apples in the hard money lending industry. As a result, a certain negative stigma was associated with hard money lenders. However, like any business, it evolved over time, and now there are many more good lenders that serve investors to do great deals across the country.
The key for you is discerning the good lenders knowing the right questions to ask to perform your due diligence. So don’t let the stigma scare you! There many new “private money lenders” who are well-trained professionals acting in the best interest of borrowers.
The hard money lending industry has seen significant change during the last decade and a cottage industry of professionals has emerged who serve as a conduit between private money investors and borrowers seeking funds for real estate projects such as rehabs, bridge loans, commercial lending, land loans, and more.
Why can’t I just go to a traditional bank lender and get my deal done?
You certainly can, however, banks generally require both strong collateral and a proven history of excellent credit and cash flow. Further, banking institutions may not provide the dual-awesome combination of speed of capital and quick decision making.
Hard money lenders are the opposite of banks. They offer more flexibility and focus primarily on the collateral for the loan and have the ability to fund a loan quickly – which can prove to be a major benefit when you’re in the midst of closing a time sensitive real estate deal.
Is hard money only for desperate borrowers?
Not at all! There are many transactions that just don’t fit the conventional lending mold, for which hard money loans are better suited. Sometimes, hard money is a preferred means of financing these transactions and allows real estate investors to leverage their cash to invest in multiple deals, instead of just one.
Examples include: commercial bridge loans, land loans, residential rehab or new constructions loans.
Are private money lenders out to steal my property?
Most private money lenders have no desire to take your property. They earn their living by servicing your loan on behalf of their investor. If they take your property, the income stream of 0.5% to 1% of the loan amount per year stops; so their incentive is to keep you in the property, and not take it away from you.
Where will I make my payments?
You may make your payments directly to the private money lender who arranged your loan or to a separate servicing company. Wherever the payment goes, you can expect less sophisticated servicing than you may have experienced with conventional loans. You should not expect a fancy web site to manage your loan. In many cases the servicing may be done on a ledger card or with basic software that doesn’t give the borrower internet access.