What is hard money and when it is a good option for real estate investor?
When thinking of investing, the source of finance is the first item in your mind. You need to have enough capital to fund your projects. However, consolidating such a huge amount of money can be mindboggling. Taking a loan comes in handy. A loan allows you to get the required amount and repay it with some interest.
Unfortunately, processing a bank loan takes a lot of time. The financial institutions must check various criteria to decide whether you qualify for a loan or not. This aspect may affect your plans and project completion. Here is where hard money comes into play.
What is hard money?
Hard money is a special type of loan you secure through your property assets instead of your creditworthiness. In other words, your property becomes the collateral to the amount of money loaned to you. A hard money lender will assess the worthiness of your property to determine the funds available for you.
This type of loan is a good option for people in real estate. Whether you plan to buy a new home, flip, or secure a deal, you can opt for the hard money credits. Good to note is that these loans are only available through private investors and companies. Financial institutions do not offer them. The loans are also short-term lasting between 1 and 3 years.
Essentially, these loans have some benefits. First, they are easy to access as they do not undergo the approval process. This aspect ensures that you get money whenever you need it to close urgent deals. Also, your creditworthiness does not matter as long as you have a property that acts as security. But the loans are only best option in various situations.
When is hard money the best option credit facility for real estate investors?
Real estate is a profitable venture. But at times, you may not have the required amount to close a deal. So, here are some instances when hard money is a good option:
When the need is urgent
Sometimes, you might have a deal lasting for a few days. For instance, someone close to you is selling a prime property but cannot wait for months or weeks. They might be moving to another city or have an issue needing urgent settling. In this situation, going through the traditional financial processes of acquiring loans can be tricky.
As you know, the banks will need time to assess your creditworthiness before approving and processing your loan. This approval process can take several months before completion. As a result, you will lose an opportunity to own that prime property. You can avoid losing such a chance by opting for hard money credit.
Since they are asset-backed loans, the borrower’s creditworthiness is not the primary determinant. You will get the loan as long as you have a property to stand as the security. So, it has a short processing time and will fit your urgent needs.
The potential profit outweighs the loan’s interest
With the short time processing, hard money credits attract high interest. The interest charged depends on the lender’s assessment of the potential risks. You can pay between 10% and 15% or even more.
Before taking this loan, it is crucial to determine the potential profit. Your returns must be beyond the potential loan cost. If the potential returns are small, you should not consider them. So, go the hard money way when your potential returns outweigh the loan costs and come with some returns.
Risk of foreclosure
Are you likely to lose your property through foreclosure? You can save yourself from such an experience by considering a hard money credit. This credit will help you repay the mortgage and have some time to pay the loan while retaining your property.
In a word, hard money can be a preferable option when in urgent need of cash. It is an excellent idea for any real estate investor who does not want to miss a prime deal. But be conscious when considering them by performing a cost return analysis.
