Many real estate investors overlook hard money loans as a strategy for acquiring property. These loans are typically used by desperate property owners looking for a way out of the real estate market, rather than into it. Hard money can work for anyone, and it can be particularly useful if you’re a new investor looking to build your portfolio quickly.
What are they?
Hard money loans can generally be described as high interest loans. They are available to borrowers with any credit rating, as long as they can can provide solid collateral. This is usually in equity in real estate, such as a home. These loans are almost never issued by banks or deposit institutions. Rather private lenders who specialize in short term lending at high interest use them.
Normally a home owner in need of a big loan would apply for a second mortgage. They are using real estate equity as collateral. Bad credit can make things difficult here. If a home owner has missed a few mortgage payments, the banks may refuse to provide more financing. Hard money might be the only option in this case.
What is the Limit?
The limit for hard money loans typically hover at about 60 to 70 per cent of a property’s quick sale value. That is the value defined as the price a lender could reasonably expect to realize if the borrower defaulted on the loan. The quick sale value would be if the property was liquidated fast. The interest rate for a hard money loan is usually in the 15 to 25% range.
Investors can take out hard money loans to buy a property as long as they provide acceptable collateral. In this case it could even be the property they’re buying. The strategy here is to find a pre-foreclosure property. Another alternative is any real estate with an owner prepared to sell below below market value as long as the sale is fast. If the investor can re-sell the property at full market value, before too much interest is paid on the hard money loan, he or she can make a significant profit. Hard money loans have helped many successful investors get started in real estate.