Finding Hard Money Equity Lenders

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Most people aren’t aware that there are ways to bypass the bank when looking for a loan. If investing in fixer-upper properties is in your horizon or you find yourself in need of cash because life situations arise that are out of your control, finding a hard money equity lender may be beneficial to your needs.

What Does Hard Money Equity Mean?

Hard money loans are asset-based loans that are primarily used in real estate transactions. In simple terms, it is a private loan that doesn’t require mounds of paperwork. A borrower receives funds and the loan is secured by real property that is used as collateral. If the borrower defaults, the collateral becomes the lenders.

“These are private investors who, if the interest rate is high enough and the perceived risk is low enough, they will put the money up,” says Pam Strickland, owner of a mortgage consulting service.

It is called “hard money” because borrowers are charged a higher price in both interest rates and orientation fees.

A hard money loan is funded by private investors as opposed to conventional lenders such as banks or credit unions. The terms of hard money loans are usually short; typically, 6 months to 3 years.

Finding Hard Money Loans Tips:

  • Find a profitable property. A hard money equity lender will not loan on a property that is going to lose money.
  • Partner with someone who is experienced. If you are new to investing, consider partnering with an experienced hard money lender with a portfolio of properties. They can help you get the loan you need and show you how to make the property profitably.
  • Cash reserves are a plus. Hard money lenders prefer to work with experienced investors who have a record of being successful. Being a new investor won’t result in an automatic no, but your chances of getting approved will increase if you have substantial cash reserves and collateral.
  • Have an exit plan. Most hard money borrowers are flipping properties for profit. Show the lender what you are doing to the property in a very detailed plan and emphasize how much money it will make.
  • Keep working on your credit score. While many lenders loan to people with bad credit, you still should try to raise your score. Maintaining a decent credit score will help secure lower interest rates and approval rates for future loans.

Why Use Hard Money Lenders?

Why would someone want to borrow money with a high-interest rate? Hard money loans can be useful for individuals with poor credit, currently unemployed, or need fast cash. According to the Urban Institute, the mortgage denial rate in 2017 was 31% largely due to poor credit. Some of the known advantages to hard money equity are:

  • Hard money loans are fast. Hard money loans can be closed in days or in a few weeks. Getting a private money loan closed quickly is very important to borrows seeking to purchase investment properties. You could easily lose the home to another buyer if you don’t act quick.
  • Hard money is flexible. Lenders of hard money look at each loan deal individually; they do not use formal underwriting like a bank. Most of these lenders are small companies so there may be more room to negotiate the terms of the agreement.
  • Approval can be easier. The collateral you are borrowing on is the most important factor in a hard money loan, especially for borrows with bad credit. If you are purchasing an investment property, lenders will usually only loan out what the property is worth. Many hard money lenders don’t care if you have a foreclosure or bankruptcy on credit; their biggest concern is profitability.

Conclusion

Although the majority of hard money loans fund real estate fix and flip projects, in 2017, Forbes reports that more borrowers are seeking loans for bridge loans (money to cover the gap between two transactions), construction loans, development, land acquisition, and short-term refinancing. Regardless of how the loan is used, this strengthens hard money lending’s noteworthy market share as compared to traditional financing.

Resources

Forbes: How The Rise Of Private Lending Is Reshaping The Mortgage Market  https://www.forbes.com/sites/forbesrealestatecouncil/2017/12/05/how-the-rise-of-private-lending-is-reshaping-the-mortgage-market/#260f681452ae

Urban Institute   https://www.urban.org/sites/default/files/publication/98823/real_denial_rates_2.pdf

SF Gate Home Guides   https://homeguides.sfgate.com/hard-money-lenders-2627.html

 

 

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 Advantages

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Being able to get money for a property investment in a short period of time isn’t always easy. Many borrowers tend to go to financial institutions to try to get a loan to finance a property, but that isn’t always the best option. It’s important to consider other financing options, such as hard money loans. With the average home in America costing over $300,000, having multiple finance options is crucial for buyers. Hard money loans sometimes get a bad rap because people don’t take the time to really understand why they can be so beneficial. The following guide walks you through a few of the advantages that come with a hard money loan.

Repayment Terms with Hard Money Loans Are Often Negotiable

When you get a loan from a financial institution, you are bound to the terms they set for the loan. This could mean the interest rate you pay, the date the payments are to be made, how large of a down payment you have to give and more. You do not have a say with most of the terms of the repayment agreement.

Hard money loans work differently. The private lenders work with you to ensure the payments are feasible for you to make. They want to be sure that the payment dates fall on a date that works with your financial situation. This means you can often pick the dates payments are due. If you have to juggle multiple debts at one time, this can be really beneficial overall. According to Consumer Finance, “Getting quotes from multiple lenders puts you in a better bargaining position.” You can compare the rates multiple lenders are offering to negotiate the best terms for your situation.

Qualify for the Loan by Meeting Less Requirements

When applying for a loan with most financial institutions, there are often a lot of hoops to jump through. A hefty down payment is often required. A high credit score and proof of income is needed, as well. With a hard money loan, these factors don’t come into play. The lenders allow you to use the property as collateral for the loan. This makes getting approval the loan less of a hassle.

Avoid Penalties for Repaying the Debt Early

Traditional lenders often charge a fee when you pay off the loan early. This is because they counted on the money, they were going to get from you in interest over an extended period of time. When you pay off the debt early, they acquire far fewer interest payments.

Hard money lenders don’t often require you to pay a fee for paying off the loan early. An origination fee is charged at the beginning of the loan that covers fees for processing the loan. Hard money lenders actually like when you pay off the loan early. They get their money back so that they can invest it in other things. It can also build a rapport with the lenders to make it easier to get approval for a loan in the future.

Gain the Ability to Make Offers on Properties Quickly

The downfall of loans from traditional lenders is that they can take a long time for approval. Every day that you go without approval for the loan is a day that someone else may be buying the property that you want to buy. You can often get approved for a hard money loan in as little as a few days. This allows you to make offers on homes quickly and easily.

Better Your Chances of Getting a Property

When someone is selling a property, they often want the buying process to finish as quickly as possible. Being able to get money quickly betters the chances of a seller accepting your offer over someone else. This can mean that you are able to get premium properties at rock bottom prices.

When choosing a hard money lender, it’s important to talk to them about the property that you plan to buy. You need to know how long you plan to own the property because you will be responsible for the payments until you are able to sell it. Hard money loans are designed to be short term. This means you have a very short term to pay them off. Be sure that any property you choose to purchase can be sold quickly so that you can pay off the loan on time.

References:

https://www.consumerfinance.gov/owning-a-home/explore-rates/

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

5 Reasons a Hard Money Loan is a Smart Choice for House Flipping

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Last year, almost 208,000 single-family homes and condos were flipped in the United States. In the state of Wyoming, the average gross profit from flipping a house was $33,475.

When a new investor starts the process of flipping a house, it’s easy to get confused and overwhelmed. The right choices can earn you a pretty penny, but less wise choices can leave you upside down. Or even worse shut down the entire project before it’s even begun.

One of the biggest choices an investor must make is which type of financing to use – a conventional bank loan or a hard money loan.  Hard money loans have a reputation for being risky, but there are many overlooked benefits to this less traditional method of funding.

1. Speed

If you have ever applied for a conventional bank loan, you know that it can be a complicated, lengthy process. The applications are often multiple pages and contain dozens upon dozens of questions to trudge through. Once the application has been submitted, it can take several weeks to get a response.

If the loan request is approved, the borrower must wait even longer for the funds to become available.  Many investors simply don’t have this kind of time – the amount of time that passes between filling out the loan application and receiving funding can cost the buyer the investment property for which they needed the money.

Hard money loan applications are simple and straightforward.  There are even hard money loan directory websites where you can submit a five minute, no-frills, no-fuss loan application to multiple Wyoming hard money lenders at the same time.

If an application is submitted in person, it isn’t unheard of to receive approval after only a brief conversation with the lender.  Once approved, funds should be available within a week or two.  In certain situations, a reputable lender can have the funds in less than a week.  This quick turnaround provides the investor with a much better chance of securing the property he seeks.

2. Leverage

Many investors like to have multiple projects in progress at the same time.  This is harder to achieve with a conventional bank loan, as a majority of these lenders will cap the number of loans provided to the same borrower at four.  Hard money lenders see the situation much differently.

They view working with a multi-property investor as a good thing because the borrower has more options available to them; therefore, the lender can cross-collateralized the properties if necessary.

3. Flexibility

The first thing many people think of when applying for a bank loan is the vast number of rules, regulations, and conditions.  Your credit score needs to be good to excellent, which means you should have very few to no missed or late payments in your credit history.

Many conventional lenders require the applicant to have a full-time job.  This can present a problem for part-time employees, independent contractors, or those who are self-employed.  Lenders put all this information together to calculate the borrower’s debt-to-income ratio, which shows how much the borrower owes in debt payments each month in comparison to his or her monthly income.

Sometimes, conventional loans even require the buyer to purchase mortgage insurance, which adds another level of paperwork and headaches.  On the contrary, hard money lenders are far less concerned with credit scores and numbers and much more concerned with possession of assets.  If a hard money lender approves a loan and the borrower fails to repay on time, the lender can seize the funded property and resell in order to reimburse the loan money.

For this reason, hard money loans are best for short term financing for projects such as house flipping.  The investor uses the hard money loan to buy the property, then flips and resells the property as quickly as possible.  The money from reselling should be enough to repay the loan in its entirety and make a profit.

4. Competitive Edge

As previously mentioned, hard money financing moves significantly faster than conventional bank lending.  In the world of real estate investment and house flipping, where multiple investors may have eyes on the same properties, speed is crucial.

Property sellers are, in general, looking for two things:  cash transactions and a quick sale.  Hard money loans provide both.  While investor A is waiting several weeks to have his application approved and loan funded, investor B has cash in hand in less than two weeks and is ready to complete the purchase.

Sellers typically go with whichever investor is prepared first, and investor B is now beginning demolition and construction while investor A is still waiting.

5. Wisdom

Hard money lenders are often industry experts.  A lender specializing in real estate investment is likely to be a wealth of knowledge. They will likely share that knowledge since the project itself is the collateral. The success of the project is what will repay the loan, the lender is also invested in the project and wants it to do well.

They do have the option, if necessary, to repossess the property, but this is not ideal.  The relationship between real estate investor and hard money lender is a partnership.  Because the lender wants the project to go smoothly, he will offer his honest opinion of the project. They will bring to light any concerns or potential issues of which the buyer might not be aware.

Through this process, the investor will not only gain wisdom for future transactions but will develop trust in his lender. Increasing the chances of a successful outcome for both parties.

House flipping has become somewhat of a phenomenon in recent years. It’s easy to see why – it’s resourceful, it’s profitable, and it’s fun.  However, it’s also very labor-extensive and can be stressful.

Don’t add to that stress by dealing with a time consuming frustrating bank loan.  Start the project off right with a quick, easy hard money loan. You will be well on your way to a beautiful finished product.  Contact a reputable hard money lender to get started.

The Low Down On Alternative Lenders And Hard Money Lenders In Particular

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Once upon a time, borrowing against a home was very easy to do. Today things are a lot different. Although it does not necessarily mean that it is impossible to get a mortgage anymore. Rather, it means that you are likely to have to seek out an ‘alternative lender’ instead. Indeed, regardless of whether you want to refinance an existing property, invest in a property, or buy your first home, alternative lenders are certainly worth your consideration.

Millennials are the largest share of home buyers at 36 percent. Sixty-five percent of these buyers were also first-time home buyers.

Who Are the Alternative Lenders?

Basically, they are organizations, groups, and individuals that aren’t banks but are happy to provide you with a loan against your property. Alternative lenders often offer very interesting benefits, including online applications, unique terms and conditions, and help for those with a poor credit score.

There are several factors that contribute to a credit score, including the number of inquiries made for new accounts.

There are also lots of different lenders out there that could be classed as ‘alternative’, although they usually span two different categories. The first is the direct lender, which means that they actually lend their own money. The second type is the broker or middleman, who connects lenders and home buyers together.

The Credit Union

One example of a direct lender is the credit union.

On average, credit unions offer higher saving rates and lower loan rates. This could help group your savings grow faster and loan cost less. Credit unions also tend to charge lower fees, require lower deposit balances and offer better service.

They are a direct lender because it is their money that is provided for home loans. They also have different mortgage process options. Usually, you do have to be a member of a credit union before you can apply, however. Additionally, it is important to be aware that not all credit unions are created equal and that they all have different membership requirements and financial options.

The second type of direct lender is an online lender.

New online-only mortgage lenders and online options for existing lending institutions are available to the public every day. As virtual tools become the new norm, homebuyers looking to finance their big purchase should expect a less intimidating and more efficient borrowing experience.

Because these lenders operate online, they often have opportunities to customize the loans that are available. Additionally, they often only take minutes to approve an application, all of which is done electronically. Their fees are also often much lower than other lenders. However, it can be difficult to speak to an actual person should you have any question.

The Hard Money Lenders as an Alternative Lender

The final option is the hard money lender. These lenders exist for two main types of individuals. First, there are there for those who have applied or tried to apply for all the other alternative lending options and either have been declined or already know they won’t meet the criteria yet. The latter is the better option as it reflects better on the credit score. The second group of individuals who use these loans are investors who know they will soon sell the property, or take out a more traditional mortgage on it. Fix and flippers are good examples of these.

Whichever type of lender you want to go with, it is vital that you exert due diligence and that you do your research. Each alternative option has its own pros and cons. At the end of the day, your financial future is at stake so it is important that you find the one that will give you the greatest benefits.

Hard Money Foreclosure Loan Saves Your Home

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Losing your job can make it very difficult to pay all of your bills on time. There are many people who find themselves drowning in debt after losing their job with seemingly no way out. One out of every 2411 homes in the United States went into foreclosure in May of 2019. If you have worked to pay off as much of your debt as you can and still find your home in foreclosure, a hard money loan may be right for you. Use the guide that follows to find out how you can use a hard money loan to save your home.

Hard Money Loans Can Bridge the Gap

A hard money loan is designed to be a temporary loan. Most hard money loans are repaid in less than two years. When you are approved for the loan, you can use the money to help pay off the debt that you own on your house so that you can stop the foreclosure process. Making your payments each month will raise your credit score. This allows you to refinance your home and pay off the debt you owe to the hard money loan.

The Interest Can Be Intimidating

Some people are intimidated by hard money loans because they have such a high-interest rate. It’s important to realize that if the loan can keep you afloat so that you don’t have to foreclose on your house, the rates are worth paying. You’ll only have to pay them for a short period of time. The lenders need to make money off of the loan and charging an interest rate is a way to make it. You are viewed as a risk to lenders and thus have to pay a higher interest rate than someone who isn’t.

You Don’t Need to Provide a Down Payment

The great thing about a hard money loan is that you don’t need to provide a down payment in order to get it. You can simply use the collateral from your home as the down payment. A third-party appraisal company will appraise the house. The appraisal allows the hard money lender to have an idea of what the value of the property is on the open market. The loan amount they offer to you will be based off of this evaluation.

Your Foreclosure Won’t Affect Your Ability to Get A Hard Money Loan

Traditional lenders will not offer someone in foreclosure a loan. This is because they are such a risk. They assume that the person will not repay their debt on time or possible not repay it at all. The hard money lenders don’t take your credit history into account. The fact that you have a foreclosure on your record doesn’t matter to them. This is because they use your home as collateral for the loan. If you fail to pay off the loan, they can take possession of it and sell it to pay off the debt you owe.

When a home goes into foreclosure, the lender can seize possession of it to sell it to pay off a debt, as well. This means that getting a hard money loan isn’t really a risk for you. It provides you with the extra time to get caught up financially without assuming any additional risks.

A Hard Money Loan Could Actually Save Your Credit

Before your home goes into foreclosure, you are notified by the lender who holds your mortgage. According to USA.gov, you should ” As soon as you realize that you are going to have trouble making your mortgage payments, contact your lender and tell them about your financial difficulties. ” You need to see if you can negotiate different terms of payment with them. If you cannot, talk to a hard money lender right away. You can get the money to pay off the loan for your home before it even goes into foreclosure. This will make it even easier to get your financial life back on track.

Having your house go into foreclosure can be very stressful. Taking the time to avoid it at all costs can make your life easier now and in the future. Talk to a hard money lender as soon as possible if you feel you’re not going to be able to pay your mortgage in the near future to find out what your options are.

References:

https://www.realtytrac.com/statsandtrends/foreclosuretrends/

https://www.usa.gov/foreclosure

 

 

How Taking Out Hard Money Loans Can Make You Rich

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Have you ever walked past an abandoned or closed store or other commercial building and thought about its potential? Many people do, but they never take it any further because they don’t have the money to invest in it. If you really want to bring out that potential, you could consider borrowing the necessary money to make that investment. This is known as an investment loan.

Real estate investment loans, which offer financing for borrowers who intend to buy-and-sell or “flip” a property, are considered riskier than mortgages for owner-occupants.

Unfortunately, investment loans are very hard to qualify for. These loans have been created for those who believe they can make a profit out of something that currently isn’t profitable. In other words, it is a high risk loan and banks are not prepared to take huge risks, except in very exceptional circumstances. That said, investment loans do exist, particularly for commercial building purchases, equipment purchases, factory constructions, and acquisitions.

However, a down payment of at least 25% is often required, which is a significant sum of money, particularly on commercial real estate properties. Most investors simply do not have such amount of money available. Furthermore, they must be able to prove that they can afford the repayments of the loan not after they find tenants for their property, but right now.

How Much Can You Borrow with an Investment Loan

In rare circumstances, lenders will agree to finance up to 100% of the investment. However, in the majority of circumstances, they will only lend up to 70%. Hence, if a property is available for $500,000, it means that you would need to have $150,000 yourself to put towards the property. This is why investment loans are more popular with established real estate investors. Those who already have a solid rental business and simply want to grow their portfolio often find it reasonably easy to find that kind of money. However, this excludes those who want to get started as investors. They need to find lenders with higher loan to value offers, but tend to also charge much higher interest rates.

Meeting the Eligibility Requirements

A second problem with investment loans is meeting the eligibility requirements. Usually, a bank will have a due diligence process in place that you will have to go through. This means having your income and your credit scrutinized as well. In addition, each bank has its own requirements on top of that. It is important to understand that an investment loan is very different from a residential mortgage, even if you want to purchase a residential investment property.

The increased risk means the bank will charge higher interest for the loan, may require a higher downpayment, and will require higher lending standards before issuing the loan. A new housing investor can get around these higher prices by living in the home for a few years before renting it out (though your lender could possibly require you to renegotiate the loan if you move out too soon).

Furthermore, the application process is very different as well, and so with the repayment term. In fact, you can expect to have to pay back an investment loan for a duration of five to 15 years. This means that the duration is much shorter than the standard 30 year mortgage. It also means that the monthly payments are much higher. When you apply for these loans, the banks will make calculations based on your ability to repay the loan within this shorter period of time.

Because these loans are almost impossible to get for first time investors, you may feel as if real estate investments will never make you rich. However, there are alternatives to the investment loan. While they have their own pros and cons, they do offer you the opportunity to consider making an investment and bringing out that potential that you saw in the property in the first place. One such alternative is the hard money loan.

Using Hard Money Loans to Get Rich with Real Estate Investments

A hard money loan is a fantastic way for you to invest in real estate properties if you don’t meet the eligibility criteria for a traditional investment loan. Private lenders often focus on real estate investments. Effectively, they invest not in the property, but rather in you and your ability to make a profit out of that property. Hard money loans may provide you with the opportunity you need.

Hard money (also known as a rehab loan or bridge loan) is the term used for loans funded by private parties who want a safe and high return. Real estate investors use hard money when they are unable to or do not have time to obtain financing from more conventional sources. Typical banks won’t fund these properties because of condition or the fact that a full-time investor isn’t typically W2 employee.

Typically, those who apply for a hard money loan don’t meet certain traditional lending criteria. They may have poor credit, no credit, or otherwise not look perfect on paper. Meanwhile, the properties they are interested in don’t look perfect on paper either. However, a hard money loan is based on assets, and particularly on the value of this asset from the perspective of a business.

One of the greatest advantages of hard money loans is that it is possible to have the money funded in a matter of days. That means you don’t have to worry about missing out on an investment opportunity because the bank took too long to make a decision. Instead, you can put an offer in straightaway.

However, if you want to get rich using hard money loans, then it is vital that you focus on being profitable. You also need to demonstrate this to lenders, who need to have confidence about your ability to repay. This isn’t about how a loan goes through the underwriting process, as it is not a home mortgage. However, it is about your ability to take a property and turn it into something that is worth more and that brings the money in. Do also be aware of the fact that, if you so much as fall behind on a single payment, the lender can and most likely will repossess the property.

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.

Lenders Are Becoming More Creative As A Result Of Bank Tightening

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At present, everybody seems to be watching what the big banks are doing. This is mainly because the third quarter results will be unveiled by Wall Street today. This will tell us a lot about the national economy and whether the pledges made by Donald Trump are starting to pay off. However, by only watching the likes of Citigroup and JPMorgan, investors are missing the more creative lenders. What happens on Wall Street is important, but so is everything else that happens in New York.

Credit Growth in Private Capital

Credit growth, it seems, is no longer in the banking sector. While banks still play a role, the real growth is in private capital. And it is also here that we are seeing the greatest innovation. Consider, as an example, HPS Investment Partners.

HPS Investment Partners, LLC (“HPS”) is a leading global investment firm with a focus on non-investment grade credit. Established in 2007, HPS has approximately 100 investment professionals and over 200 total employees, and is headquartered in New York with ten additional offices globally.

HPS has some $39 billion in investment capital. It was once part of JPMorgan Asset Management but it is now completely independent. It is also no longer simply a hedge fund, having morphed into something else. They have announced, for instance, that they will now lend some $6.5 billion to other companies, offering private debt and specialty loans. The money comes through limited partners’ equity investments as well as the bank debt.

Banks Borrow from Investment Firms to Provide Loans

What this basically means is that big banks will borrow HPS money, and this money will be used to create corporate loans. This is a new construction, as corporate loans would, in the past, simply be supplied directly by banks.

That said, the HPS example is the biggest of its kind and it is hard to tell whether others are using similar constructions. This is due to the opacity of the private market as a whole. However, similar tools have now been created by BlueBay and Apollo. Then again, consultants such as Preqin have seen significant increases in levels of private debt as well.

2017 is certainly off to a strong start, specifically bolstered by the highly active direct lending segment in the US. Fund managers across strategies are seeing increased and sustained investor appetite for access to all parts of the market at this point in the credit cycle, when a hybrid of private debt strategies are poised to return strong results. Finally, with 284 private debt funds in market globally targeting more than $112bn, competition for investor allocations will remain fierce for the remainder of 2017.

The banks are keen to say that this is not healthy. However, financiers disagree. They believe that, since banks are so reluctant to provide loans nowadays, hard money lenders are a necessity to ensure the economy can grow. While certain borrowers are certainly high risk, they are also necessary to the economy.

Outlook on Private Loans

Private debt, clearly, is a demonstration of creativity in the entrepreneurial market. It is a main driver of economic growth. It also does not offer such a huge systemic threat, since the credit risk is shared across different banks rather than a singe one. Should the loan turn sour, the limited partners are those most affected. Furthermore, there is no chance of capital flight, because the loans are locked for up to seven years.

However, some are worried that the sector is growing too soon and too fast. The Great Recession of 2007 was caused by loans being provided too quickly, with too few securities. There is a risk that hard money lenders are going the same way, unless proper lessons have been learned.

House Flipping On The Rise Again, Thanks To Hard Money Lending

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When the financial crisis started in 2008, there were fewer people flipping houses. However, it seems that house flipping is now back with a vengeance. In 2016, it reached a 10 year high, in fact.

193,009 single family homes and condos were flipped – sold in an arms-length transfer for the second time within a 12-month period – in 2016, up 3.1 percent from 2015 to the highest level since 2006, when 276,067 single family homes and condos were flipped.

Rising Popularity of House Flipping

What flipping properties means is that investors need quick and smooth access to a lot of cash, even if that means paying a higher rate of interest as well. Because there is usually at least an 8% return on the loans provided to investors engaged in house flipping, hard money lenders find those loans attractive. Providing loans for house flipping has been an interesting industry for a very long time, but it is becoming more and more popular again, despite the fact that there are some significant risks attached to the loans.

Risks of Providing Loans to House Flipping Investors

Some of those risks include an inability of a developer to pay the loan back. Additionally, there is always a chance that there will be a decline in real estate prices. When that happens, it becomes impossible to sell the property for a profit, and charging rent will usually not be enough to cover the cost of the hard money loan.

Today, there are numerous lenders that focus specifically on the hard money industry. They have increased their transparency and their underwriting process is becoming more conservative as well. At the same time, this can be risky for investors, because these type of constructions have not yet been tested by the market.

That said, the loans remain very attractive, specifically because of their speed and ease of access. Yet, some experts say that it was house flippers who were behind the financial crash, rather than people who borrowed beyond their means.

The latest comes in a new NBER working paper arguing that it was wealthy or middle-class house-flipping speculators who blew up the bubble to cataclysmic proportions, and then wrecked local housing markets when they defaulted en masse.

Lessons Have Been Learned from the Previous Financial Crash

Yet, it seems that lessons have been learned. Bank mortgages are much less stable, because they have such a low loan-to-value (LTV) ratio, which is what is used as a risk assessment. On average, the LTV is around 55% for hard money loans, where it stands at between 75% and 80% for a bank mortgage. This means that, if a property does indeed lose its value, the lenders are still protected. It also means that flippers won’t walk away from the property, since nearly half of its value is their own money.

Why Hard Money Lending Works

Many also feel that hard money lending works because it is a form of partnership. The lender wants the borrowers to be successful and what they do. With a bank mortgage, the goal is simply to earn as much money as possible. Hence, if a problem does occur, a hard money lender is more likely to help find solutions. This is particularly true because the loan itself is usually only in place for 12 months.

Lenders do not believe that there is a possibility that another bubble burst will happen because of the short duration of each of these loans. At the same time, however, they do diversify their own portfolios as well. Mainly, they do this by investing in different geographical areas, and by focusing on a wide range of real estate properties, such as land, commercial properties, and residential properties.

Of course, this does mean that capital has to be raised from individuals as well. Hard money lenders are, more often than not, individuals or small groups of individuals. They need to be attracted to these systems by making it clear that their portfolio will instantly be diversified. Furthermore, there is a chance of an 11% return within 12 months, which is very significant. Meanwhile, for lenders, one of the greatest benefits is the speed at which the loan can be made available.

It is possible to score a hard money loan very quickly! This is one of the great benefits of choosing a hard money lender versus a traditional bank. The first step is to gather together all of your deal points and fill out an application. Within a 10-minute conversation with the lender, assuming you present the circumstances of your plan in a clear and organized fashion, they should be able to tell you whether or not it seems like a deal they are interested in funding.

Price to Pay for the Speed and Convenience of Hard Money Loans

Of course, there is a price to pay for this speed and convenience, one of which is the high interest rate. In fact, interest rates are often around 12%. Added to that are fees, charged as percentage points, which usually stand at a further 4%.

Yet, what makes these loans so attractive is the fact that there is a lot of money to be made in this industry. Choose the market right, and a return of 35% to 40% is possible. That said, returns tend to be quite lower, but certainly more than enough to repay the loan and the interest rates, and still have a significant profit at the end of it.

The big worry at the present time, however, is whether a collapse is looming or not. When we consider, however, the fact that many high net worth individuals are moving towards providing hard money loans rather than moving away from it, it seems that they feel quite confident about the market still continuing to be strong. Just like with every type of investment, you must consider each option on an individual level. Calculate the cost of fixing the property before flipping it, what the market in your geographical area is like, your ability to invest not just your money but also your time, and so on. It seems unlikely that the crash of 2008 is only just around the corner, or even that it will happen at all. However, that does not mean you can become complacent when investing in real estate either.