Many of the “real estate experts” stress the importance of using other people’s money (OPM). Their reason for using OPM, is to defer risk. 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.
Hard money loans are privately funded loans that have high interest rates and high origination fees. These loans are “hard” because they have very strict terms and expensive fees. Hard money loans aren’t cheap. They usually have high interest rates, about 10-18%, plus upfront fees from 3-5 points.
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. Traditional loans base their risk on the borrowers credit, debt to income ratio, and job history. 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.
There is a place for hard money loans, and they can be a valuable means for making real estate deals happen. In some instances, to get a deal, investers must act quickly. They must aquire loan money quickly. Good hard money lenders in California can provide financing within just a few days. If it is a good investment, despite the high borrowing costs there can still be a significant profit. The potential profit is more important than purchase costs.
If a real estate invester borrowed 100 Grand, and sold it three months later for 140 Grand. 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.