Benefits Versus Drawbacks of Hard Money Loans
If you want to fix and flip properties, getting traditional funding may be impossible. Banks are often reluctant to partner with such investors, as they sometimes have trouble seeing the potential inherent in a run-down property. Hard money loans can be a perfect substitute for these borrowers. Private investors and investor groups offer these loans independently. Seekers must recognize that these deals come with a host of strengths and weaknesses that need serious consideration before moving forward.
Strengths of Hard Money
One great asset of hard money loans is that they’re quick. Since you are working directly with someone rather than a corporate entity, there are few application requirements. Unlike traditional lenders, those handing over money will not check your credit score nor inquire about debt. They’re only interested in knowing that the building in question will generate profit. The cash could arrive in your account in no more than a few weeks or days. Banks can take months to approve applicants.
Traditional banks are reluctant to hand lenders large amounts. The more their customers want, the more they charge. Independent lenders may be willing to supply the entire sum you need without additional strings attached.
Once you establish a good relationship with a lender, that person is likely to want to work with you in the future. If so, your fiscal connection will have complete freedom to offer better terms and conditions.
Weaknesses of Hard Money
Expect the independent loan you accept to come with higher interest rates than those associated with traditional loans. The rate will likely fall between 10% and 20%.
You will also need to pay an upfront percentage of the loan. Autonomous lenders know they are playing a risky game. Because of this, they charge up to five times more than a traditional bank.
Hard money loans are inappropriate for those seeking a long-term arrangement. Mortgages typically stretch for many years. Hard money borrowers often need to pay back their loans within a couple of years or possibly a few months. If you miss the deadline, the already high-interest rate could climb even higher. Worst of all, you might wind up losing the property altogether, making your efforts a financial wash.
Hard money loans are sometimes the perfect solution for real estate investors needing cash. They’re easy to get, flexible, and speedy. On the other hand, they come with drawbacks, such as unfavorable interest rates and costly origination fees. Think carefully before funding adventures in house-flipping with one of these offers.