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Is Financing Real Estate With Hard Money Smart?
By Vic Hurlstorm | August 8, 2010
A lot of the “real estate investment guru’s. They say it’s best to use other people’s money to defer risk, but really it’s because they want people without money to invest in real estate. 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, high interest, high fee real estate loans are known as hard money. 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 4 points, plus double digit interest.
One of the major differences with hard money lending, and other types of financing is the criteria used to determine finance risk. 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 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 do have a purpose, and can be a valuable tool for people getting into real estate investing. 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 potential profit is more important than purchase costs.
If an investor borrowed $100,000 from a hard money lender at 20% interest, and sold it three months later for $140,000. 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..
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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