Many of the “real estate experts” stress the importance of using other people’s money (OPM). These “experts” say that it’s better to invest with other peoples money because then you get a greater return on your investment. If you’re not confident in your real estate investment enough to be using your own money, then you probably shouldn’t be taking that investment option. But that’s not the point of this article, today we will talk about hard money.

Privately funded loans with high interest rates and fees intended for temporary financing are known as hard money loans. These loans are “hard” because they have very strict terms and expensive fees. Hard money loans aren’t cheap. They usually have an upfront origination fee of 3 to 5 percent, and double digit interest rates.

The main difference between hard money loans and traditional mortgage loans is the criteria used to determine finance worthiness. The loan worthiness for traditional financing is determined by the borrower. The lender will only loan money if the borrower has a good credit score, a low debt to income ratio, and a consistent stream of income in which they will be able to pay for the debt. Hard money lenders place their emphasis on the value of the real estate. When the value of the property is worth significantly more than the amount financed, hard money lenders will typically grant financing. If the borrower happens to default, the hard money lender doesn’t have a problem foreclosing on a property with substantial equity.

There is a place for hard money loans, and they can be a valuable means for making real estate deals happen. Many foreclosure auction and other deals need financing very fast. They must come up with money fast. A good hard money lender in Virginia can fund money within 48 hours. If the property purchased really is a good real estate investment, and the buyer has a good timely exit strategy, then even though the borrowing cost may be high, the profit made is worth the cost. The potential profit is more important than purchase costs.

Lets say an investor borrowed $100,000 to purchase a property, and then sold it six months later for $140,000. If up front they paid three points that would be $3,000, plus $6,000 in monthly interest. Their profit would have been three times greater than the hard money lenders..

Real Estate investors can benefit from hard money loans, but need to be careful with the way they use them as the costs are very high.




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