Real estate investing can be a profitable avenue for accumulating wealth. This type of investing uses real estate properties as an investment vehicle and gains profit through a variety of methods. For example, when you own real estate, you can collect cash flow in rental income, or sell the asset for a higher price due to appreciation.
Hard money loans are commonly used within the realm of real estate investment when you don’t want to put down a large sum of money upfront to buy real estate. While this sort of loan has advantages over regular finance, it also has some downsides. There is still a requirement for a capital buffer.
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What is a Hard Money Loan?
A hard money loan is a short-term, non-bank loan that is frequently employed in the real estate investing industry. This type of loan doesn’t come from traditional lenders, but rather from people or private companies that accept property or an asset as collateral. Hard money loans are described by the terms asset-based loans, STABBL loans, and bridge loans.
Hard money loans are a good choice for real estate investors and developers as they are frequently used for fix and flip or remodeling. Such loans can be speedier, less complicated, and more flexible than traditional financing.
A hard money loan is a secured and asset-based loan which means it is not dependent on the borrower’s ability to repay the loan. In the case of a secured loan, the lender can take ownership of the asset to recoup its losses. The approval process for a hard money loan is less stringent and happens fairly quickly, in just a few days.
How Can Hard Money Loans be Used in Real Estate?
The following recommendations for using hard money loans for real estate investments will help you manage your money and time in a more effective manner.
Purchase Property
You can finance the purchase, repairs, and renovations of the property due to hard money loans that can be approved quickly and the funds can be disbursed in a short period of time. This will enable you to acquire the property and begin the renovations in no time.
For doing this, you will need to submit a detailed business plan to the lender and put down a higher down payment than you would with a traditional loan. Sometimes hard money loans are not the best option for everyone as they have higher interest rates than other types of loans.
Hard money loans are typically short-term loans, and the lender charges higher interest rates to compensate for the risk that the property may not sell or the renovations won’t go as planned, so the lender could be left with a property that is worth less than what was borrowed. That’s why the lender charges a higher interest rate to compensate for that risk.
Refinance Debt
Refinancing the existing debt on a property is another common use of hard money loans. If you have an investment property that has been financed with a traditional loan, a hard money loan can serve for refinancing that loan. This will enable you to save money on your monthly payments and pay off the loan faster.
Like other loans, hard money loans have risks, too. One of them is that the lender could foreclose on the property if you default on the loan. Thus you may lose your investment property and the equity you have in it. Another risk is that if the value of the property decreases, you could end up owing more on the loan than the property is worth. As a result, you would lose money on the deal and could even end up in debt.
Flipping Houses
Finally, hard money loans can be used for flipping houses. This is a process when an investor buys a property, makes repairs or renovations, and then sells it for a profit.
One of the upsides of using a hard money loan for flipping houses is that you can get the funding you need quickly allowing you to take advantage of opportunities as they arise. Another advantage is that you can get more funding for your project – both for the purchase of the property and the repairs or renovations that need to be made.
Now, let’s consider the risks associated with flipping houses. One risk is that you may be left with a loss on your investment as the property may not sell for as much as you had hoped. For instance, if you borrowed $130,000 to finance the purchase and repairs of a property and it only sold for $100,000, you would have to come up with the $30,000 difference.
Another risk is that the repairs or renovations may cost more than you had anticipated leading to a loss on your investment.
To sum up, hard money loans can be a great option for wealthy investors who need to obtain funding for an investment property quickly. But one should pay close attention to the fees, interest rates, and loan terms.
