Whether you’re investing in a property to fix and sell, a landlord looking to invest in rental property, or a builder looking to get a construction loan, you’ve likely heard that hard money loans from private lenders are the best way to go. This all sounds like a no brainer but you should truly understand the difference between the two and if it makes financial sense for what you are trying to accomplish. Here we’ll talk about the pros and cons of choosing a hard money loan, and some things to expect when going through them.
Pros Of Hard Money Loans
- Quick Approval: For Fix and Flips or construction loans, the borrower will typically be hard-pressed to get the loan within a certain amount of time that traditional lenders may have difficulty adhering to, due to the mountains of paperwork required and long standard approval processing times. With hard money loans, however, you can expect to close on a deal much more quickly – some within as little as 24 hours, for Boston we’ve average around 7 days. Once you’ve developed a relationship with a lender, the process can move even more quickly, allowing you to turn your properties around and make a faster profit.
- Flexibility: because hard money lenders don’t use a complicated standardized underwriting process, they are able to evaluate each deal individually, and depending on your situation, and your relationship with the lender, you may have a little more wiggle room. This makes them much easier to work with than traditional lenders.
- More Collateral Options: with hard money lenders, they are investing in the value of the property or properties themselves, not your individual credit. Due to this, they are typically willing to accept different types of collateral as long as the borrower can present profitable collateral to secure the loan. This means presenting them with solid plans for the property, as well as value of the land and the property as it is currently, to give them a better understanding of what they are working with.
Cons Of Hard Money Loans
- Higher Interest: the one major downside of hard money loans is the typically higher interest and fee rates due up front. The higher terms are due to the fact that they focus on the property value rather than the borrower, but may increase the risk on the borrower’s part. When choosing a hard money loan, make sure you’re managing your investments carefully and properly to avoid default or loss of property.
- Short-Term Only: because they are private loans and are used primarily for the renovation, building, or flipping of property, many hard money loans are only available as a short-term means of financing. These usually range anywhere from 6 months to 2 years, and because of this the payments per month are typically higher along with the higher interest rates.