What Is Hard Money?

Real estate investors turn to several different funding sources when they have found an acquisition opportunity.  Some use all cash (which may be conglomerated from several different investors) and some use bank financing.  Many investors consider using hard money.  Just what are they talking about when discussing the use of hard money?

Hard money is nothing more than private funding from a professional lender.  In other words, a hard money lender is one that uses loaning funds to investors as their own form of investing.  Sometimes you will hear people talk about investing in paper assets.  An example of a paper asset would be the note a hard money lender takes from a borrower.

Why Consider Using Hard Money?

How many investors have the ability to pay all cash?  In other words..not require help from anyone but their own bank account?  While we don't have a scientific answer we can say that generally, real estate investors are using a combination of funding sources.

The most difficult of these sources are traditional banks.   Banks have both government regulations and stockholders to answer to.   So, borrowing from a bank can be difficult unless the borrower has a significant down payment and financial wherewithal beyond just the real estate project they are attempting to purchase.

Without the constraints of government and stockholders, a hard money lender offers

  • Faster response.
  • More flexibility.
  • Will consider the deal based on its merits rather than just the financial strength of the borrowers

It is true that many hard money lenders do have investors who they are promising a return on their money.  To achieve the anticipated return the hard money lenders evaluate requests differently than banks.

What Criteria Does A Hard Money Lender Consider?

While there are similarities in lending across most platforms, hard money lenders focus specifically on the following:

  • Borrowers experience with similar real estate deals.
  • Future value of the real estate asset (after repairs).
  • Credit of the borrower.
  • Liquidity (available cash) of the borrower.

What To Look For In A Hard Money Lender?

A Partner

The hard money lender may be able to provide significantly beneficial advise as to the terms and structure of your acquisition and debt.  Consider finding one that operates like a partner that wants your transaction to succeed.

Speed

Without all the constraints of banks, look for a lender who states they can turn around a specific request into funding in 7-10 days.   Of course this speed is based on having already established some basics on personal financial condition with the lender pending presentation of a request.

Speed is also related to the funding process.  You can gain some comfort whether the lender can perform as quickly as promised if you ask about the source of the funds they will be lending.  A hard money lender loaning their own capital will be much faster to fund than one that utilizes outside investors who may need to approve the funding also.

Terms

Before actually presenting a borrowing request, be sure to understand the fee structure used by the hard money lender.  Expect the terms used by the lender to include:

  • Funding fees.
  • Interest Rate.
  • Length of the loan.
  • Penalties if payback is delayed.

Finding A Hard Money Lender

Your local investment team should have contacts.  If you are using a real estate broker for your acquisition start with them.  Property managers also frequently interact with hard money lenders and can provide names in the market.

Now that you know what is hard money you can decide should you use hard money for your next acquisition?

 

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