“Hard money” loans are the reverse of easily gained “soft money.” Hard money loans are made when the traditional bank lending qualifications do not match either the borrower (often a contractor or investor) or the property (perhaps a restoration project). The valuation and saleability of the property secure hard money loans rather than the credentials of the borrower (although that has changed somewhat), and loan-to-value ratios are kept low to protect the lender.
The Pros and Cons of Hard Money Investment
The benefits of becoming an investor with a private lender are notable, though hard money loans are a non-traditional investment:
Private lending of real estate gives the investor true diversification. Stock market whims, global politics, or even long-term real estate patterns do not impact the rate of return.
Obtain an overall:
Investment funds are backed without requiring investors to buy or maintain rental assets against newly appraised real estate. Usually, the existing or increased value of the property is loaned at a maximum of about 65 percent.
Without tying up their money for years (or decades) at a time, investors can earn proven, stable prices. (Typically, borrowers are given a fixed rate, annualized, without charge, anywhere between mid-single digits to low double digits, although terms differ by lender and individual deals.)
Hard money loans were not sold, re-sold, other investment instruments were converted into stocks, and then bundled in bulk to cover shortcomings. These are quick, direct, secured loans that have been assessed individually to protect both the lender and the loan structuring business. Hard money loans, like the financial instruments that triggered the subprime meltdown, were not sold, re-sold, turned into stocks of other investment instruments, and then bundled in bulk to cover shortcomings. Borrowers from private lenders are individually tested and eligible and investors are important business partners that the private lender needs to keep happy.
There are also possible risks to being an investor in hard money:
Although it may be very easy to put money in a deposit certificate or even an index fund mirroring a certain index, doing your due diligence with hard money loans is particularly important.
While some investors put deals together and personally lend the money, we just suggest using the services of an established, trustworthy firm that finds, analyzes, and puts the deals together. Get referrals and suggestions to find one, review references, and ask questions, such as:
– In which place will your loan be? (The first position is chosen, since that means that in a deal you are the first to be paid.)
– How much do they lend, if changes are made, on the value of the house, or expected value? (Not more than a conservative 65% of the value we want to see.)
– When a creditor defaults, what happens? Know the next steps, which could involve foreclosure.
Frame of Time:
Hard money loans and rehab loans, mostly in the 6-12 month range, are, by default, a shorter-term strategy. (Of course, for some investors, that might work perfectly!) Then you have to wait for another hard money loan or find somewhere else to put your money. Ideally, you’ll work with a business with which you can make multiple transactions over time.
Probability of risk:
Every effort is made to safeguard the original investment of the lender, and also the interest owed, if necessary. It can take longer than expected, however, and the only true assurance you have is the value of the home or land. Although this might sound less-than-sure, consider these details in order to put the danger into perspective:
“First, there is no stock market crash insurance policy, and in any economy, a business such as Enron can go from riding high to crawling on the ground before you can say, “Sell my stock! In real estate, however, a “worst case scenario” might look like a burning down house-and you’re insured for that!
Secondly, value is speculative in your mutual fund or equity investments. They are not collateralized with real estate, nor are they regarded to be comparable quality and value collateral to real estate. Ask your bank manager how much they are willing to lend on a piece of residential real estate, and in certain cases, the response would be at least 80%, even up to 100% of the appraised value. Ask the same bank manager now how much they’re going to loan you for your mutual funds.