Hard Money Loans: The Hard Truth

When investors hear the term hard money loan (HML), they might associate it with exorbitant interest rates and unscrupulous lenders waiting to seize their wealth through cross-collateralization.

But this fear-based perspective only focuses on the downsides of what can be a valuable tool for investors.

The truth is that hard money loans can be a crucial advantage for experienced investors who understand their market and are looking to move quickly to increase the value of their properties through new construction development or renovation of existing structures. 

These investors must be comfortable conducting their own risk assessment, understand the risk vs. reward of their specific venture, and have a clear exit strategy.

How Hard Money Loans Work

The idea of an HML is to borrow and utilize capital against the equity you already possess (whether in cash, property, or both). 

The primary benefit of HMLs is speed. Investors can typically obtain an HML within weeks or even days rather than months. Private lenders looking to generate a profit usually charge a higher interest rate and interest-only payment terms since the loans are for short periods. 

What To Look For with Hard Money Loans

When borrowing HMLs, investors must be aware of the factors in play and have pre-planned exit strategies:

• You must understand your prepayment penalty term, if there is one, as this can impact your financial plan.
• Understand your cash reserves. In limited-budget situations, target the basic portions of functionality required for insurance. You want to do this as a hedge against going over budget.
• Understand what dark, gray, and vanilla shell conditions of a commercial location will do to your ability to provide valid proof of insurance to a permanent lender.
• Having a functional/permitted roof and secure doors and windows are some of the basic recommendations for reinvesting HML funds and help to improve your chances of a successful progression. Having those essential items completed will also be more inviting to other investors.

If you need money for a purchase, need to increase cash reserves and be financially prepared to move on hot deals, put your equity to work and apply for a hard money loan today.