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.