Should Hard Money Loans Be Used For Real Estate Investing?
Many of the “real estate experts” stress the importance of using other people’s money (OPM). 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 are “hard” because they have very strict terms and expensive fees. Hard money loans are usually really expensive. They typically have an upfront origination fee of three to four points, plus 12-18% interest.
The primary difference between hard money lending, and other types of lending, is the subject criteria. The focus on traditional mortgage loans is the borrower. Traditional loans base their risk on the borrowers credit, debt to income ratio, and job history. With hard money loans, the main focus is on the value of the property. If the property is worth more than the amount to be borrowed, hard money lenders will likely provide the funds. If the borrower happens to default, the hard money lender doesn’t have a problem foreclosing on a property with substantial 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 have to finance the property in a matter of days. Good hard money lenders in California can provide financing 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 important factor is the net profit, not the costs spent.
Lets say a real estate investor borrowed $100,000 at 10% interest, flipped a property, and then sold it for $140,000 six months later. The upfront fee was $3,000, or 3 points. They may have paid the hard money lender Nine Thousand Dollars, but they would have netted more than Thirty Thousand..
Smart real estate investors who use hard money loans wisely can make large profits, but using other people’s money is not always the most profitable method for Charlottesville VA real estate investing.