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How Does A Hard Money Loan Work?

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It is quite common for people new to the real estate investing market to not quite understand all the jargon and terminology that is out there. One particular term is that of “hard money”, which continues to be very poorly understood. That said, more investors are trying to increase their understanding of this type of construction, which could suggest there is starting to be more knowledge of the inner workings of a hard money loan. Let’s take a look at just what it is, however.

Just What Is Hard Money?

In most cases, a hard money lender (HML) is not a bank or traditional financial institution, but rather a small group of investors or even an individual.

Hard money lenders are companies that loan money to fund real estate investor transactions for the short term.

Essentially, the money they lend you is based not on your credit score and ability to repay a mortgage over a long period of time, but rather on the value of the property that you want to buy. Percentage-wise, they are far more expensive than traditional mortgages. However, because they are short term loans, usually only for a few years rather than the 25-year average of a mortgage, they can be quite affordable, so long as you know what you are getting into, and you use the loans properly.

Who Needs a Hard Money Loan?

The two most common types of people who look for hard money loans are property developers and fix and flip investors.

Fix and flip is really a slang term to describe a type of real estate investment deal. The fix part is where a real estate investor purchases an undesireable single family home below market value and does some repairs to the property in order to make it more appealing. The idea is to significantly increase the market value of the property with the minimal expense possible so that the home can be resold for profit.

They use it to fund interesting deals, because it is quite common to be able to get a 100% finance deal with hard money loans. However, in order to get this type of loan, you are likely to have put down a number of important assets. You have to be able to prove that you have a property that you will be able to sell for a profit very rapidly, and most lenders will also want to know why you can’t get a regular mortgage. It is common for new investors to use hard money to get their first property so that they can get started with investing. Others take out a hard money loan, fix a property, and then get a regular mortgage to pay off the hard money loan but keep the property.

What this all means is that a hard money loan allows people to have quick and easy access to significant sums of money, without having to jump through red tape and complex bureaucratic hoops. Indeed, perhaps the greatest benefit of the hard money loan is how quickly you can get hold of funds.

They have lightning-fast approval times (which in reality is around five days). When you get your money faster, you’ll be able to jump on the best deals instead of watching them slip away.

If you do require funds as quickly as that, then it is best to find a local hard money lender. This is because many will want to meet you in person, and they will also want to see the property, particularly if they do not know you yet. Once you have that relationship in place, however, things can move very quickly. In fact, a lot of hard money loans do not require you to complete an appraisal of the property, and the only cost associated is that of the origination fees.

Naturally, different lenders have different rules and regulations in place. You can find a hard money lender that will charge you around 12% in interest and as little as 1% origination fees for a loan of at least one year, or 2% origination fees for loans of shorter duration. If you look properly, you might even be able to find a lender who doesn’t charge any origination fees at all. However, not all hard money lenders are created equally. You must understand that they are a type of secondary investor. You invest in property, make changes, and make a profit. They invest in you, while you make those changes, and they profit. It is a very easy way to make a passive income, therefore, for those who have those types of funds available. Unfortunately, therefore, it is also a sector that lends itself to some underhanded tactics and you do have to be careful to not fall prey to a loan shark, which is a very dangerous situation.

Loan sharks often have ties to organized crime or other gang type activity. If you turn one in to the police, you might be answering to some very angry friends of theirs. At that point, paying the debt will be the least of your concerns.

If a deal seems a little bit too good to be true, or too easy to access, you need to be careful. This is particularly true for your very first hard money loan. Once you have had one successful transaction, you will have a relationship in place that you can build on. Because these lenders need you to make their money, they will usually be happy enough to provide you with loans time and time again.

So what should you look for in a good hard money lender? Usually, they will charge around 13% in annual fees, as well as around 5% origination. However, this does depend on which state you are in. Some will also ask you to pay a commitment fee, which may seem like an unnecessary expense, but may actually be really good protection for both you and them. Do your research, and you should be able to get a really good loan product.
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Bad Credit Not A Barrier Towards Getting A Hard Money Loan

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A lot of people think that, if they have bad credit, there are no finance options available to them at all anymore. However, it is interesting to note that hard money loans are less interested in credit scores and more interested in a number of other things. While there certainly are significant disadvantages to taking out a hard money loan, the fact that they are available for people with bad credit makes them very interesting.

The Problem with Institutional Lenders

A lot of people think that the world of mortgages is dominated by banks and other forms of traditional and institutional lenders. In reality, this is no longer the case as non-traditional lenders begin to take over the financial system.

In 2011, 50 percent of all new mortgage money was loaned by the three biggest banks in the United States. At the same time, six of the top 10 largest lenders by volume were non-banks.

Traditional lenders usually lend between 80% and 90% of the value of a property. However:

They only look at a property’s purchase price, not its potential.

They don’t provide mortgages for distressed or vacant properties.

They care mainly about the credit score of the applicant, rather than the money to be made on the property.

The Hard Money Lender Experience

Hard money lenders also care about credit score, but not much. Their underwriting process is very different, however.

Hard money lenders are primarily concerned with the amount of equity the borrower has invested in the property that will be used as collateral. They are less concerned with the borrower’s credit rating. Issues on a borrower’s record such as a foreclosure or short sale can be overlooked if the borrower has the capital to pay the interest on the loan.

What a private lender is interested in is what a property will be worth after repairs. They are also more interested in whether a borrower has any real estate investing experience. Finally, they want to see people who are happy to put their own money into the pot. Naturally, a good credit rating helps in all of that, but it is not the be all and end all of the process.

How to Get a Hard Money Loan Approved if You Have Bad Credit

If you do have bad credit, then the following tips may be of benefit to you in order to increase your chances of approval:

  1. Focus on due diligence. Make sure that you write a stellar proposition that they simply cannot say no to, by covering every angle.
  2. Provide an explanation as to why your credit score is less than perfect. Explain the things that have gone wrong in the past and what you have done to ameliorate the situation.
  3. Try to give the private lender peace of mind. You need to showcase that it is also in your interest to have a successful project. To prove that you believe in your proposal, you should put as much of your own money towards it as you can. You also need to write an exit strategy and explain how you intend to repay the loan.

As you can see, it is possible to get a hard money loan even if you have bad credit. While that doesn’t mean your credit score doesn’t matter, it is more a case of other things being far more important. That is one of the main things that set private lenders apart from traditional institutions. A hard money lender wants to invest in projects that look profitable and likely to succeed. Hence, they will look at each proposal individually, rather than having a tick box exercise like traditional lenders generally do.

How To Get A Hard Money Loan

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If you are a small business looking to invest in your company, a land developer or even an architect, you may already be aware of hard money loans. With the inflexibility of banks or other traditional lending institutions, you may have decided that a hard money loan is the best way for you to finance a project without having to sell any property or assets.

How do you go about getting a hard money loan? Much easier than you might think. Here are some tips to go about it the right way.

Find a Good Hard Money Lender

Firstly, it’s important to do your research. The American Association of Private Lenders estimates that there are around 40% more hard money loan providers in the country than there were three years ago! So, although the market has widened, it is not subject to much regulation, so don’t just go to the first one that you come across.

Genuine hard money loan providers will be interested in your project, and they hope to build long term relationships. Some, although thankfully very few, are simply glorified loan sharks. Learn the difference before you get burned. According to Jay Garner, chief executive of Quicken Loans, a lender who has provided hard money loans nationally, companies such as theirs has a mission “to lend to people properly and responsibly, following the guidelines established by the particular agency that we’re selling mortgages to.”

Here are some ways to discern the good from the bad:

  • Reviews – ask around locally, especially with real estate companies, if there’s anyone they have heard of who is well regarded in the area.
  • Has this lender financed loans like the one you are seeking at any time in the past? It’s a red flag if they haven’t.
  • Can you meet the hard money lender, or at least someone that works for them? If not, it’s best to avoid them, as they may just want to get your money.

Applying for a Hard Money Loan

Now you have found a reliable lender you need to present your plan. Even though you don’t need the same amount of documentation as for a normal bank, you still have to come prepared.

  1. Let the hard money loan provider know the value of the property in question. This is one of the most important pieces of information for them, not your credit score. The loan will be given against this. You may need to present budgets for construction or renovation and repairs.
  2. Tell them about the area that the property is in. Have information on how much other homes/businesses went for in the area. They are looking for a good investment. Have your prices of other developments and properties in that area? You can check out zillow.com and realtor.com to do some research.
  3. Show them your financial plan for the property. You can likely get between 60 – 70% of the after-repair value of the property, but you’ll need to come up with the rest. If you have some cash in hand, then it will make the approval even quicker.

If you have a history of making risky, but ultimately good investments, then let them know.

Ensure that you get some legal advice before you sign a contract with a hard money lender. You need to make sure that you are protected within the terms of the agreement. Also, ask your lawyer about any impact that the hard money loan may have on your personal liability.

You should stay in contact with the hard money lender. Give them the information they need to show how much you want the loan. Especially in cases where they only lend to a small number of people, if you miss out, they may have decided to lend to another party.

Things to Note

A hard money loan is not the same as a mortgage or a loan from a traditional lender. The terms are different – usually the approval time is a lot less, and you require less documentation. However, you also will have to pay the loan back much quicker than a traditional loan and at a higher rate of interest. If you think that this works in your favor and that you still stand to benefit from the transaction then it could be a fantastic decision.

Resources:

https://www.bloomberg.com/news/articles/2019-06-12/high-interest-lenders-up-40-even-as-home-flipping-trend-weakens

https://www.nytimes.com/2019/06/11/business/risky-borrowing-shadow-banking.html

What Can a Hard Money Lender Do For You in Today’s Market?

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Do you have a small business that needs some extra funds? A hard money lender might be the answer to your financial problems. Learn more about how hard money lenders can give you the loan you need to stay in business.

How Hard Money Lending Works

Have you tried to take out a loan with traditional banking? They often deny your request if you have bad credit or don’t have proof of a steady income. It makes it nearly impossible to keep your business running without some extra financial assistance. Therefore, some small businesses or startups have to resort to hard money loans.

Quick Hard Money Lending Process

You can easily apply online for a hard money loan as soon as you find a few that you can trust with your business. The significant part about hard money loans is everything is faster, from your application acceptance to getting the money you might need right away.

This can come in handy for those trying to build businesses such as flipping properties. If you depend on traditional banking, it might take too long to buy the property you have your eye on. Or to get the materials in time to get those renovations done. Sometimes fast money can be crucial to the success of your business when you are flipping properties or other similar businesses.

Don’t Need A Good Credit Score for a Hard Money Lender

Do you have bad credit? It doesn’t mean an instant denial of getting a loan when you go through hard money lending. Instead, a hard money lender can help you where banks and credit unions will usually deny your request when your credit is too low.

According to the Senate Committee on Banking and Financial Institutions, hard money loans are for “people with tarnished credit, whose low credit scores render them ineligible for more traditional forms of credit.” You don’t have to worry about having any other alternatives to save your business from bankruptcy.

Hard Money Lender Policies

Like with any loan, it’s better if you check each hard money lender’s policies. They will all give you different estimates on how much money you can borrow. This can be good since you find out which one offers the best deal possible, meaning you get to borrow enough without having to worry about any additional fees.

These lenders will all have different rules on any fees or points that they will charge you. So, make sure you know what each lender’s policy is with their hard money loans. These fees or points can add up to a lot of money if you aren’t careful.

Downfalls of Using a Hard Money Lender

Hard money loans sound good when you have nowhere else to turn to. However, don’t be too hasty in accepting the first offer presented to you.

High-Interest Rates and Points

Since you have to repay the loan faster than traditional lenders, prepare to pay more than you borrowed. As reported by the Senate Committee on Banking and Financial Institutions, hard money lenders give you a shorter amount of time to repay the loans.

So, this means you might have higher interest rates and points than traditional loans. Those interest rates and points can be high, so always think it over before signing up with any hard money lender.

Get Legal Advice Before Signing

A hard money lender can be helpful for businesses, but you also have to be careful with the paperwork involved. If hard money loans are your last resort, then this will make you vulnerable. They might try to add clauses that you might not understand that will add stipulations even after you repay them their money.

You should have the clauses in your deal looked over by someone who can give you legal advice on it. If you don’t, you might get yourself into something you didn’t know you agreed upon.

Are you ready to get a hard money loan? If your business is in danger of shutting down before it begins, you might need to look into getting this loan. It can save you from having to pull the plug on your business before you can make your dream job a reality. So, why not look into getting help from a hard money lender? You can go over your choices with your family or business partner and see what the best option for your business should be.

Sources: https://sbnk.senate.ca.gov/sites/sbnk.senate.ca.gov/files/final%20backgrounder.pdf

 

 

Benefits Of A Hard Money Loan

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Hard money loans are a fantastic funding solution for those who have difficulty obtaining more traditional loans. They can have great benefits for the borrower.

Banks and mortgage lenders can be quite strict with their lending requirements. Those can make it challenging for those with poor credit or financial hardships to get loans.

That’s where hard money loans come into play, opening up new opportunities for investing in property at a great price. You should know about some of the major benefits associated with hard money loans.

Hard Money Loans are Easier to Obtain

When you choose a hard money loan, you are able to take advantage of the benefits. That’s because hard money loans tend to be easier to obtain than traditional avenues of funding. In many cases, these non-standard hard money loans from private lenders will be approved more quickly with less paperwork.

Hard money lenders won’t do as much background research into your financial history, they can take bigger risks. Whereas banks approve or reject loan applications based on credit ratings and scores. Hard money lenders look at the value of the collateral instead. This collateral is typically a real estate property. Although there are higher risks involved, hard money lenders can justify this by charging higher interest rates and fees.

Borrowers who obtain hard money loans are not usually deterred by the higher interest rates. They don’t plan on having a hard money mortgage forever. Financial columnist and journalist  Jean Chatzky said – debt isn’t always bad, “A mortgage can help you afford a home. Student loans can be a necessity for getting a good job. Both are investments worth making.”

When it comes to deciding whether or not a hard money loan is right for you, you have to think about your likelihood of getting a bank loan and also what your plans are for the property.

Hard Money Loans can Have Benefits

One of the other things you should know about hard money loans is that they are advantageous for those looking for funding right away. If you’re in a hurry to get your funds or you’re struggling to get approved through regular resources like banks or mortgage lenders, then hard money loans can help you get the property you want or stave off foreclosure.

There’s a lot of people out there buying real estate, as the volume of loans to homebuyers looking to renovate and resell increased to about $20 billion last year. That’s a 37% rise from 2016 and nearly double the amount from five years ago. Many of these purchasers took advantage of attractive hard money loans to lessen their risk of foreclosure.

Another benefit of hard money loans is that they can come in handy if you’re trying to buy a new home while selling an old one. Perhaps you need a hard money loan to cover a down payment while the proceeds from the sale of your previous property are not yet available. If there’s not enough time or availability to get a loan from a bank, hard money lenders can help.

Both real estate investors and homeowners can refinance their properties with hard money loans. One thing to always remember about hard money loans is that you want to be quite confident your financial outlook is positive. Most people pay back a hard money loan within a few years once they sell the property. That way, they aren’t stuck with those higher interest rates forever. So whether you’re getting into house flipping or you’re eager to avoid foreclosure, hard money loans will work well as long as you’re ready to repay the loan sooner rather than later.

Hard Money Loans Assist Real Estate Developers

Those involved in real estate development may also use hard money loans for projects that won’t get approved for bank loans. For example, projects that have yet to receive final permits and approval are unlikely to receive a conventional loan because the bank can’t be positive that the project would make it past the development stage. Non-standard loans like hard money funding can be used to finance these projects. Once the permits are all in place, the real estate developer can apply for a conventional loan to repay the hard money loan.

For those real estate developers who want a more flexible funding option, it makes sense to explore hard money loans. If you are interested in hard money loans, you can always ask a reputable lender for more details.

Sources:

“Jean Chatzky Quotes.” BrainyQuote, Xplore, https://www.brainyquote.com/quotes/jean_chatzky_724897.

Sasso, Michael. “Home-Flipping Trend Weakens as High-Interest Lenders Jump 40%.” Bloomberg.com, Bloomberg, 13 June 2019, https://www.bloomberg.com/news/articles/2019-06-12/high-interest-lenders-up-40-even-as-home-flipping-trend-weakens.

 

 

Refinance

How to Refinance a Hard Money Loan

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A hard money loan offers borrowers an opportunity to get quick financing without having to deal with the red tape associated with traditional bank loans. They’re often used by people facing foreclosure or looking for capital in order to flip a piece of real estate. These loans have high interest rates and shorter repayment periods, which means they need to be paid back quickly. However, if this is a problem, you can refinance a hard money loan.

For many people, this is a great time to buy a house. According to the U.S. Department of Housing and Urban Development, mortgage rates have fallen since November of 2018, reaching an average weekly low of 3.75% in June.

Unfortunately, those with bad credit still aren’t able to secure a loan from a bank. However, with a hard money loan, a private lender uses the value of the property as collateral instead of looking at your credit score. But what happens when the unexpected occurs and you can’t pay back the lender on time? It turns out there are ways to refinance a hard money loan. Let’s go over a few.

Consider a Fixed Mortgage

If you secured a hard money loan to purchase your home or avoid foreclosure, you may now be able to get approved for a fixed mortgage loan. Sure, you weren’t able to get approved for a traditional mortgage loan in the first place, but things could be different now. The initial hard money loan may have allowed you to improve your credit score.

Securing a fixed mortgage loan will allow you to pay off the private lender you got the hard money loan from. This may seem counterproductive. However, a fixed mortgage will carry a much longer repayment period and allow you to lock into a low interest rate.

This approach allows for a lot more breathing room than a hard money loan does. You have more time to focus on paying off the loan. Plus, your monthly budget won’t be eaten up by high interest rates.

Refinance with a Home Equity Loan

If you got a hard money loan to make renovations to your home, you may be able to use a home equity loan to pay it off. It’s important to remember that you’ll need to have acquired healthy equity and also a good credit score. If you don’t have this, you won’t get the loan.

Some homeowners seek out hard money loans when they can’t get a home equity loan due to bad credit. The hard money loan allows them the financial security to rebuild their credit score. If you’re in this position and want to refinance a hard money loan, consider applying for a home equity loan again. You healthier credit will make it easier to get approved.

Look for a Subprime Lender

Another option is to find a subprime lender to secure financing to pay off your hard money loan. Many subprime lenders work with banks and provide options for those who don’t qualify for a traditional loan.

What makes these lenders unique is they’ll do business with individuals with bad credit and lots of debt. The subprime loans they offer carry different terms. There’s a good chance you’ll have an interest-only or adjustable-rate mortgage.

On the surface, these loans may seem unattractive. However, they allow you the ability to refinance a hard money loan and enjoy a long repayment period.

A Cash Loan

If your hard money loan has a relatively low balance, getting a cash loan will allow you to pay it off quickly. This approach should only be used as a last resort, as most cash loans have very high interest rates. Many of these loans also come with fees. However, as Warren Buffet said, “Cash combined with courage in a crisis is priceless.” It may be time to bite the bullet.

Only consider this option if you’re at risk of losing your property by not adhering to the terms of the hard money lender. Yes, you’ll have to deal with paying back the cash loan, but you won’t lose your home. Look for a lender who’ll provide a little flexibility regarding the terms of your cash loan. If you find the right lender, you may be able to pay it off without much hassle.

Resources:

https://www.huduser.gov/portal/sites/default/files/pdf/Housing-Market-Indicators-Report-July-2019.pdf

https://www.investopedia.com/terms/s/subprimeloan.asp

What is a Hard Money Loan?

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The phrase hard money loan has a negative connotation for many people. Maybe that’s because it sounds too good to be true.

Hard money’s bad reputation is also due to predatory lenders who preyed on homeowners years ago in an attempt to recoup their properties when loans weren’t repaid. They offered very risky, even shady, loans and many people took the bait.

Fortunately, these lenders are no longer able to operate today. The truth of the matter is that this type of loan has and will continue to provide opportunities to homeowners and investors.

If you’ve heard of hard money loans, but aren’t exactly sure what they involve, keep reading. We’re going over what they are and how they can be beneficial.

The Basics of a Hard Money Loan

Also called bridge loans, hard money loans are meant to provide quick cash to real estate investors or homeowners. They’re typically issued by private lenders instead of large banks.

These are short-term loans that don’t require the borrower to have great credit. In fact, lenders typically don’t even pay attention to an applicant’s financial history. Instead, they use the value of the property as collateral against the loan.

Because a person’s credit score isn’t considered, hard money loans can be approved and issued very quickly. However, borrowers have much less time to pay back the loan. If they default, the lender can seize the property to recoup the money.

It’s important to understand that a hard money loan isn’t for everyone. However, if used correctly, they can be a great resource for people wanting to secure their financial situation or those needing capital to get a project off the ground.

Advantages Borrowers Enjoy

To quote Benjamin Franklin, “If you would know the value of money, go and try to borrow some; for he that goes a borrowing goes a sorrowing.” This seems like good advice, but it definitely doesn’t apply to many hard money borrowers.

Because a hard money loan is structured differently than a traditional bank loan, it carries several advantages. These benefits give borrowers much more freedom.

A primary benefit is the convenience surrounding the application and approval process. Because lenders aren’t looking at an applicant’s credit score, the loan can go through very quickly. With a traditional bank loan, it could take months.

Another huge benefit is flexibility concerning repayment terms. Remember, these are private investors, which means you have more wiggle room to negotiate.

Finally, many lenders will sometimes allow borrowers to use other personal assets as collateral instead of the property. This is great if your home is in disrepair and you need money to fix it up.

Interest Rates

The primary downside of hard money loans is interest rates. They’re typically higher than those attached to a traditional bank loan.

This is due to the fact that lenders must take on more risk. As a way of protecting themselves, they need to increase rates. They’re usually between 10% and 15%. This will change based on the lender and the value of the property in question.

It’s important to keep in mind that hard money loan interest rates will vary based on where you live. States with a large number of hard money lenders will have lower interest rates due to tougher competition.

Situations Where Hard Money Lending Can Help

Home prices have been trending up. According to the U.S. Census Bureau, the median price of a new house sold in May 2019 was $308,000. This means people will need more money to cover down payments.

Home flippers who buy homes, refurbish them, and then sell them for a profit must have quick capital when a home they want comes on the market. It simply doesn’t make sense for them to jump through the hoops required to get a traditional bank loan. Instead, they can use hard money loans to make quick purchases, sell the home, and repay the loan.

Hard money loans are also perfect for real estate investors looking to start a construction project. They can’t put the project on hold while they wait for a bank to complete the approval process. Working with a hard money lender means they get the capital they need right away.

Finally, these loans are helpful for individuals who want to own their own home but have bad credit. As long as they follow the repayment terms, they can enjoy living in a house they love without dealing with a bank.

Resources:

https://www.census.gov/construction/nrs/pdf/newressales.pdf

 

How Does A Hard Money Loan Work And Who Is It For?

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A hard money loan is a unique financial construction. It is a short term loan and is offered as interest only. These loans are perfect for those wanting to purchase distressed rehab properties, for which it is impossible to get a traditional mortgage. The interest rate on a hard money loan tends to be a lot higher, with averages of around 12%. However, they can be completed in as little as 15 days and they usually run for no longer than a year, after which the property can be flipped.

Anyone interested in investing in properties very quickly, therefore, may want to consider this type of loan. While they are expensive, they are also quick and reasonably easy to obtain. This makes them interesting for those who would otherwise be declined.

When applying for a loan from a normal financial institution, you will be expected to meet many hard-set requirements. […] As long as you have a high-value asset with at least 20% equity stake in it, there are good chances that you will qualify for the loan.

How Do Private Loans Work?

Private loans are designed to help fund a real estate investment’s purchase and renovation. They are quick to obtain, particularly compared to a traditional mortgage, and they have very flexible acceptance criteria. Fix and flippers, who buy and sell properties within a year, are particularly interested in them.

In addition, they can also be beneficial for a long term investor who holds a property but then switches to a traditional mortgage after renovating a property. As such, the timeline of investment is not so important. Rather, it is about needing money to buy a property that is in disrepair and having the funds for the repairs. Typically, people only pay interest back on their hard money loan while it is running. Generally speaking, these loans also have no prepayment penalties.

While lenders want their money back also – interest is still important to them. When you prepay, you are cutting into the overall interest a lender can earn on financing your loan.

What this means is that, should you complete the work on the property sooner than expected, you can pay off the loan sooner as well. Typically, investors like these types of loans because they pay out so quickly and have minimal requirements. These benefits are so great, in fact, that they are happy to pay more for the loans. Interest rates usually range between 7% and 12%, and lender fees (points) are between 1% and 10%.

Should You Take out a Hard Money Loan?

If you are a short term investor, such as a fix and flipper who doesn’t intend to hold a property for more than 12 months, then you may want to consider a hard money loan. If you are a long term investor, then you should really only consider this type of loan if you know that you will be approved for a more traditional, long term, affordable loan after a reasonably short period of time. Typically, two kinds of investors will consider private lending.

First, there are the fix and flip investors.

Fix and flipping homes may seem like a pretty simple concept. Buy a house that needs some work, fix it up and sell the house. The truth is it takes a lot of time to find the right deal, find the right financing, find the right contractor, decide what to repair, maintain a property, value a property, make sure all the needed repairs are done and then sell the house. Fix and flipping is not something you can spend a couple of hours on a week and be successful.

The reason why fix and flippers look for a hard money loan is because it allows them to finance the purchase price of the property and the money required to pay for the work that needs to be done on the property. Hence, fix and flippers try to find homes in a very poor condition, fix it rapidly, and sell it for, sometimes, huge profit. They find these properties through lender owned REO listings, foreclosure auctions, and short sales.

Usually, investors are able to receive a private loan based on the ARV (after repair value) of the property. They receive the funds, buy the property, and fix it using their hard money line of credit. These investors do have to have some money themselves in order to be accepted for these loans, not in the least because they may have to float rehab costs as it can take a little bit of time before the lender pays out. Once renovations are completed, they sell the property and pay back the lender.

The second type of investor interested in private loans is the buy and hold investor.

Buy and hold is a passive investment strategy for which an investor buys stocks and holds them for a long period regardless of fluctuations in the market. An investor who employs a buy-and-hold strategy actively selects stocks but is not concerned with short-term price movements and technical indicators.

Typically, these investors use a hard money loan to purchase and fix a property. Once that is completed, they take out a traditional mortgage on the property itself and pay off their private loan. They then hold the property, either for them to live in or rent out to tenants and become a landlord. Buy and hold investors looking for a hard money loan generally purchase distressed properties, which means a traditional lender will not fund the deal. This means that they bridge the time period between buying and fixing the property and it becoming a property that a traditional bank would be happy to provide a loan for As such, the loan in this case can be seen as a type of bridging loan.

Qualifying for a Hard Money Loan

Whether you are a fix and flip or a buy and hold investor, one of the biggest benefits of the hard money loan is that it is so easy to qualify. The approval process is also incredibly rapid. However, you do have to be realistic about the serious financial commitment you are making.

Hard Money Lending And Self-Directed IRAs

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Hard money lending is quite a complex financial construction. However, it is also one that can greatly benefit real estate investors. This is due to a variety of reasons, although one of the key ones is the speed with which these loans can be arranged.

Using a Self-Directed IRA to Build Wealth

Meanwhile, another important aspect of hard money lending is how they benefit those who provide the money. Indeed, it is becoming increasingly common for people to use a self-directed IRA to build their wealth through the provision of hard money loans.

Because most financial institutions continue to require solid credit scores and spend weeks reviewing financial statements, tax returns and business plans, there is a growing need for quick financing for many individuals, small business and investors, especially real estate developers and builders for their real estate projects.

Benefit of Diversification

It is important to understand, however, that only those who have a very high risk tolerance should even consider making this type of investment. On the other hand, if you have that tolerance, then there are some considerable benefits to providing real estate investors with hard money loans. One of the key benefits is the diversification of your investment portfolio.

Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Benefits of Hard Money Lending for Both Lender and Borrower

Clearly, therefore, hard money lending, when done properly, is beneficial to both the lender, and the borrower. However, being practical is incredibly important. Those who request hard money loans tend to be the type of people who are denied bank loans and other forms of traditional funding. This means that they are high risk borrowers. Not just that, these loans are used for real estate purchases, and there is never any real security in real estate either. Finally, it is common for the borrowers to be newly created real estate enterprises that have not yet demonstrated their viability. It is a significant gamble to take, therefore, but also one that could truly pay off, if managed properly.

Essentially, when people first take out a hard money loan, they usually have little to no cash flow. Most of the time, no repayments are made for the first few months, or even more, of the agreement. Rather, the loan will mature at a later stage, requiring a balloon payment that pays the investors the value they expected. Naturally, they hope for growth on their investment and this is why a self-directed IRA could be so beneficial, as this provides a tax-protected environment.

Investing with a self-directed IRA isn’t much different than investing outside of an IRA. There are a few minor differences and some rules to be aware of.

Obviously, therefore, if an investor has a high risk tolerance for a long term investment, then this could be an ideal situation. It will not, however, work for someone who is approaching retirement, or who does not have a lot of money set aside.

Overall, what financial experts agree upon is that hard money loans have so many different avenues for all the different players involved in them. While some feel that these loans are incredibly risky, the reality is that they give people the chance to make investments, which in turn is good for the economy. At the same time, it enables those who have some money put aside, to see this grow, albeit over a longer period of time. While all financial constructions have risks associated with them, this seems to be the best solution of all.

The Best Investments To Consider In 2019

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The year 2019 is now upon us and, for some people, it means they finally have a little bit of money to invest. Some people got a raise, others received a nice bonus, others came into some money in some other way. Whatever the source of the extra funds, it is very important to make sure that you invest that money in the right place, but where is that? Most of us know that there are thousands of things that you can invest in if you want to, but choosing the one that is right may seem to be very difficult.

This is a situation known as analysis paralysis, meaning you feel overwhelmed by the number of possibilities that are out there.

Occurs when an individual becomes so lost in the process of examining and evaluating various points of data that he or she is unable to make a decision with it. Analysis paralysis can occur with many decisions, including investment decisions such as buying or selling securities. The inaction it causes can easily lead to losses in a portfolio or missed chances at larger profits.

If you have extra cash and you want to put it to good use, you have to find the right investments. This does mean you have to analyze your options, but you do have to make a decision at some point. So what are the two options for you to consider in 2019?

Option 1 – Peer to Peer Lending

Peer to peer lending is becoming increasingly popular and there are now some well-established names in this field. One of them is the Lending Club, although platforms such as Prosper are equally interesting.

Lending Club is an online peer-to-peer (P2P) lending platform that takes the banker out of banking. Investors lend money directly to borrowers through the website, enabling both to benefit from the rate of interest established for each loan.

What companies like Lending Club and Prosper allow you to do, is loan money to people in the same way a bank does, but using your own money. In essence, you will become a hard money lender. The rate of return on doing so is really good, standing at around 6% on average. When you invest in peer to peer lending, what you are effectively doing is investing in other people’s ideas.

P2P lending is still a place to earn market-beating yields of up to 7%. But private investors are now competing against the world’s biggest financial institutions. So it’s important to have a good plan.

It is up to you to decide how much you want to lend in total, and how much you want to lend to each individual. For instance, it is not unheard of for people to only lend $25 to each person they support. This means the risk is relatively small.

Naturally, financial institutions have been worried about peer to peer lending for some time. That being said, a lot of financial advisors are now starting to see that the system makes sense, particularly as an investment strategy. It is very easy to become a peer to peer lender and the system is relatively safe. Add to this a rate of return of between 5% and 7%, and the fact that you can start with just $1,000, and it quickly becomes clear why this is a good system.

Option 2 – Real Estate

Real estate is perhaps the most traditional form of investment of all. Most people would love to own an investment property, seeing quite a lot of money in it. However, being a landlord is hard work and not everybody is cut out for it. A lot of people try to invest in real estate, find it much harder than they had expected, and end up losing their investment.

That said, you can invest in real estate and not become a landlord. This is possible in a number of different ways. One is to become a hard money lender once again, and work with fix and flippers who do the hard work for you. Another is to purchase real estate notes instead of entire pieces of real estate. The latter is a very interesting proposition for those who want to invest their own money. Essentially, it means that you lend money to an investor who manages the properties, and who pays you interest or dividend in return. They do the hard work, you supply the money.

Naturally, real estate is risky and you never know whether you will truly get value for money. However, you can mitigate this risk by going through new types of channels such as Fundrise.

Fundrise is the first service that makes the benefits of private market real estate investing available to you through one simple platform. By combining technology with new federal regulations, we bring the once-unattainable world of private investments directly to you.

Through Fundrise, people with relatively small amounts of money, from as little as $1,000 in fact, can invest in real estate in a very hands off manner. So hands off, in fact, that you don’t have to have any real knowledge about the property you have invested in. Once you start to invest with Fundrise, you don’t really have to do anything anymore. The rate of return isn’t fixed, but it is claimed to be between 8.76% and 12.42%, and they have been consistent in this for five years running. That is a significant return that you could take advantage of.

Even with Fundrise, there are risks involved. One of the key risks is that it is a relatively new company, which means their data may not yet be representative of the truth. Furthermore, you give your money and allow someone else to make the important investment decisions. For some, this is a benefit because it means they will never fall victim to analysis paralysis, but others are concerned that they have no control at all.

Whichever option you choose, you will effectively become a hard money lender. But what sets you apart is that you won’t be a lender that has millions to spend. You can do this with relatively small amounts of money.