The term “hard money loan” evokes negative emotions in the real estate investment community. Some say the loans are too expensive, are for investors with less-than-stellar credit or do not meet financing requirements.
By definition, a Hard Money Loan (HML), is simply an asset-based loan secured by Real Property, typically needing significant repairs. HML’s are loans that maximize an investor’s leverage to acquire a property at a discount by providing a quick closing. These loans are very valuable for many real estate investors.
HML’s are typically risk-based on the pricing models, therefore they have many underwriting requirements to control the risk. This causes roadblocks for investors to be able to continue to fund their deals.
A few potential roadblocks that an investor may encounter include:
INABILITY TO CASH OUT
This is one of the most common uses for a HML as many Lenders have limitations on how many properties you may own and still be eligible for a cash out. These same Lenders would not have any restrictions if it was a non-cash out. The solution is to cash out with the hard money loan and then refinance into a traditional loan product.
The more properties that an investor buys, the more potential financing issues that they will encounter. Conventional loan programs limit an investor to ten financed properties. Solution is to buy multiple properties then refinance into a blanket/portfolio loan that is large enough for a commercial lender.
In order to qualify for any additional loans, and to meet the limit requirements, liability for a hard money loan may be transferred from an individual to a company. On other loan products this is very difficult.
There are sources of funds, that may be allocated that do not have any negative recourse towards the investor, for example IRA Funds. With permission, this may accomplish a short-term solution until such time the debit is refinanced with a portfolio or securitized product.
SECOND SET OF EYES
Many times investors do not have access to reliable MLS comps or reasonable repair estimates. HM Lenders can act as a resource to help reduce the chance of over estimating the ARV or getting gouged by the contractor. Conversely, using low quality materials and rehab, expecting the highest possible value.
Each of these scenarios can be overcome with a hard money loan. These loans are great when used in combination with other types of loans and can accelerate your wealth building!
Wealth through Real Estate is nothing but a financing game .