Hard Money Loans Offer Tools for the Investor

A hard money loan is a type of asset-based financing that uses real property as collateral to secure the loan. They are different from a conventional mortgage or bank loan and are often backed by private investors, or companies that specialize in this type of financing instrument. Although private homeowners can obtain this type of financing, it is typically reserved for investors who want to increase their portfolio. Hard money loans can be the perfect solution for someone who needs money fast so that they can take advantage of the perfect deal.

Fix and Flip 

Fix and flippers are investors who want to purchase a home and then sell it for a profit within 12 months. Hard money loans are perfect for this type of arrangement because the terms are typically between one and three years. There is also an option to pay only the interest while the home is being renovated and then pay off the loan as soon as it is sold for profit. This provides an opportunity for fast cash for both the lender and the flipper.

Flippers typically look for houses that are in poor condition but would have a significantly increased market value if they were renovated. They often look for them at foreclosure auctions, short sales, or as lender-owned REO properties. In this case, the loan is for both the purchase of the house and the necessary renovations to increase its value. In this case the amount of the loan that can be obtained is based on the final market value (FMV) after renovations, rather than the initial purchase price of the property.

Buy and Hold

Buy and hold investors are similar to fix and flippers, only they want to buy a house, renovate it, and then rented it out to tenants. One of the difficulties with getting a traditional mortgage is that many banks will not lend for properties that are in poor condition. However, rundown houses have a considerable upside for long-term investors. Hard money rehab loans are used to circumvents the problem with obtaining a traditional bank loan for these properties.

The typical scenario is that the buy and hold investor will find a property through lender-owned REO properties, foreclosure auctions, sheriff’s sales, or short sales. They will finance the property through a hard lender. Once the renovations are complete and they have rented out the property, they will refinance with a conventional mortgage and pay off the hard loan. When a buy-and-hold investor has done this successfully enough times, they may qualify for permanent financing that allows them to compete with cash buyers at real estate auctions. They do not even have to go through the paper work.

Portfolio Investors

Portfolio investors are long-term investors who often purchase multiple properties at one time. They use hard monies to get around limitations by lending institutions that only loan out a maximum of 4 to 10 conventional loans per person. These types of investors typically already have a high amount of leverage and only use hard money loans to increase their existing portfolio.

The portfolio investor uses hard money to purchase both houses that are in good and poor condition. The condition of the home determines whether the loan is issued as a percentage of the houses after-rehab-value (ARV) or the home’s loan-to-value (LTV) ratio. Like buy-and-hold investors, portfolio investors use hard money for the leverage and speed that it gives them. Even though portfolio buyers may have a lot of leverage and asset value, they may also have a low credit score because of the number of loans they have out and the current value of their properties.

Hard money loans are often a tool that is used for those who want to get into fix and flip investing, and for those who are already experienced in these types of investments. Hard money loans allow all types of investors to compete with cash buyers when they see a property that they believe will bring them high returns in the future. Real estate agents like hard money loan investors because it is similar to buying with cash. Many times, investors can get a lower price by using a hard money loan.

When a conventional loan or mortgage is unable to provide funding, hard loan lenders can make the deal happen, and they can do it quickly. Hard loans do not have as much paperwork as conventional loans, making them a hassle-free option for investors who are ready to make a purchase. Hard loans offer options that conventional loans do not, making them preferred over traditional loans by many experienced investors. Hard money loans are seen as a great tool for real estate speculators who must act quickly to beat their competitors to an opportunity.