Real estate can be very lucrative. At the same time, the amount of capital needed to survive in the sector can be very high.
Often real estate investors have to depend on loans to finance their operations. Due to the time-sensitive nature of some aspects of real estate business dealings, loans from conventional lenders such as banks and other lending institutions may not be ideal.
This makes hard money lenders one of the most commonly used forms of financing in the sector. Hard money loans have a reputation of being slightly expensive due to the risks involved, which leaves many wondering if the option is really worth it.
What is a hard money lender?
A hard money lender, also known as a private lender, is an individual or an organization that lends its money in hard money loans to investors at an interest. These lenders are independent of financial institutions and interact with investors directly with minimal federal reserve bank regulation.
If you are looking to get a hard money lender for the first time, you will want to do sufficient due diligence to ensure that you are dealing with a reliable lender. The good news is there are many hard money directories for real estate investors, such as HardMoneyHome.com, that can help you connect with the most reliable local private lenders.
What makes money lenders better than conventional lenders?
1. Approval times
It can take as long as 45 days to have a conventional loan approved. This is a major deal-breaker for real estate investors that deal with time-sensitive deals, such as a fix and flip type of business.
On the other hand, hard money lenders take an average of one week to approve a loan. If you’re lucky or have a history with a lender, you might be able to get a loan approved in a day. This means you will have money with you as fast as you need it to avoid losing out on opportunities.
2. Flexibility
Traditional lenders have rigid procedures that make them not so ideal of an option for real estate investors. For example, you may be required to purchase a home that does not comply with the Federal Housing Authority’s (FHA) criteria. But based on your experience, it is possible to fix it and sell it at a profit.
A traditional lender may not approve such funding because it doesn’t meet the FHA standards. However, based on your experience with similar projects, a hard money lender can readily approve your loan.
Additionally, you do not have to have a good credit score to access private lending. Private lenders look at a project’s viability and a client’s track record of success on similar initiatives. Better still, the purchased property acts as collateral which helps minimize the risk for the lender and the borrower.
3. Repayment periods and interest rates
Repayments for conventional mortgages stretch over a long period, sometimes even up to 30 years. On top of that, the rates can be very low, with the current rates standing at an average of 2.75%.
On the other hand, hard money loans are shorter, with repayment periods between six months and two years. Current private loan rates stand at 10-15%, a difference of over 9% from conventional mortgages. Therefore, if you are looking for easy repayment terms, conventional loans win on that front.
Bottom line
While both conventional and hard money lenders have their place, hard money loans are a lifeline for most real estate investors, thanks to their less stringent approval times and processes. From an investor’s point of view, hard money loans are worth taking.