Investing in real estate is an option that people are considering now more than ever. Although the value of real estate can fluctuate, it is doubtlessly an asset. For that matter, real estate has many potential avenues. Some choose to invest in commercial real estate, becoming the land lords of small business owners. Others are delving into the ever popular realm of flipping houses. With that being said, many Americans aren’t certain about how they’re going to get the loans necessary to invest in real estate. It’s estimated that, not including mortgages, the typical American has about $38,000 of debt. The debt you already have — and your credit in general — can make it difficult for you to acquire construction loans, as well as the much-discussed “fix and flip” loans. Hard money loans offer unique opportunities for those who want to invest in real estate; and fortunately for Atlanta residents, Atlanta itself has 50 hard money lenders offering loans in the city itself.
But understanding how hard money loans work can be difficult, and even intimidating. A lot of people hesitate over hard money loans because they simply don’t know what hard money lenders do. Below, we’re going to look at hard money loans, and why private lending may be a potential avenue for you.
What Is Hard Money Lending?
So: how do hard money lenders operate, and what makes borrowing from them different from taking out a traditional loan? Essentially, hard money lenders offer short-term loans that are usually used to finance a specific investment project. Usually, this type of loan is specifically used by “house flippers”. Typically, they will be issued by private lenders — that is to say, individuals who may or may not work together in a collective — instead of by a major financial institution. However, the real difference is in what hard money lenders use to gauge the viability of a loan. When it comes to real estate, a hard money lender will focus on the property itself to decide whether or not the loan is worth giving. If a house is being flipped, a hard money lender will focus on the potential “after repair” value of a home — that is to say, what the home can sell for after it’s been renovated.
What Are The Potential Risks Of Hard Money Loans?
Certainly, you should be careful when evaluating whether or not a hard money loan is right for you. Keep in mind that hard money loans typically have interest rates that average at 13.3%. Furthermore, the initial service fees and origination costs can add to the overall cost of a hard money loan. The biggest thing to keep in mind when considering a hard money loan is that it will have a short repayment period, relatively speaking. Hard money lenders lend with the idea that they will see a return on their investment sooner rather than later. Don’t take on a hard money loan without evaluating your project — and yourself — honestly.
Why Are Hard Money Loans Worth It?
Ultimately, there is a reason why a lot of potential “house flippers” often end up taking advantage of hard money loans. For one thing, you can secure a hard money loan in a matter of weeks, whereas traditional loans can take months to get — which is time during which you can lose out on a potential project. Another great thing about hard money loans is that, because you’re working with a private lender, you may be able to negotiate certain terms. There is flexibility available, which can’t be found when you work with major financial institutions. Finally, a hard money loan doesn’t always require real estate as collateral. If you have other assets available that a private lender is able to value, that can open the door necessary for you to get the loan you need.
A hard money loan may or may not be right for you. However — if your priority is investing in and flipping real estate, you should certainly consider it.