Choosing to invest in real estate can be a smart move if it’s done correctly. A lot of mistakes can be made along the way, but real estate is a great way to increase income — but before you invest in real estate, figure out what type of financing you’re interested in. If cash isn’t a viable option, a hard money loan could be the way to go. So let’s talk a bit about what a hard money loan is and why it can be beneficial.
What exactly is a hard money loan?
A hard money loan is typically defined as a short-term loan that’s used in real estate investments. These loans can be used by anyone interested in making a real estate transaction but because they are often short-term, they are primarily used by investors looking to fix up a house and sell it right away. The terms for hard money loans are generally 12 months but can last up to 5 years if needed. When someone applies for this type of loan, the lender will ensure something is put up for collateral to protect their money. Working with hard money lenders can be a shorter and often more flexible process than working with a bank for a traditional loan.
What’s the difference between hard money and private money?
People often mistake hard money loans for private money loans — and while both are given by private lenders, they have a lot of differences. Hard money loans are given by brokers who require a short loan term, and this money is largely used on real estate. Private loans, on the other hand, are usually given by someone that the borrower has a relationship with. So if a family member or friend were to lend someone money, that would be considered private money. Also, private money can be used for almost anything and can vary greatly in the amount given. When it comes to the amount given in a hard money loan, the lender will base the amount off of the value of the property. Hard money brokers in Texas will lend the amount they believe will cover the cost of the real estate transaction so they don’t give more than they have to, to protect their interest. Like any other loan, hard money loans require monthly payments and usually have interest applied.
Benefits of a hard money loan
Compared to getting a traditional loan from a bank, hard money loans have a lot of benefits to offer real estate investors. For starters, hard money loans can be more convenient. When a real estate deal arises, investors often have to work quickly to get the money — otherwise, they might miss out on the property. While traditional bank loans can take months to get, hard money loans can be approved within just a few weeks. So if investors find themselves in a time crunch, a hard money loan can get them the funding they need more quickly. And hard money loans can be used for whatever the borrower needs for their real estate investment. Some loans may have specific terms that only permit the borrower to use the money for certain aspects of real estate. But with hard money loans, borrowers can use the money as they best see fit. So whether they’re using the money to purchase the property or hire a basement repair company down the line, they can use the loan to do whatever is necessary. And hard money loans also tend to have more flexible terms than traditional loans. So if a borrower needs to adjust their payment schedule, this can be done more easily than if they were working with a bank.
Hard money loans have a lot of advantages for real estate investors. These loans can give investors the money they need to purchase a property without the hassle of dealing with a bank, offering convenience and more flexibility.