When Does Using A Hard Money Loan Make Sense?
If you have been thinking about getting into real estate investing, you may have heard about hard money loans. If you haven’t, hard money loans (HML) are loans by private lenders who are willing to take on higher risks than banks. Since these loans are higher risk, they also come with higher interest rates, and will cost you more than a traditional bank loan.
If a HML is more expensive than a traditional loan, why would someone want one?
While traditional loans are great for traditional mortgages, HML are meant for people who are looking to treat their real estate like a business. HML are generally short term loans that help bridge a real estate investor between the purchase of a property, and when renovations are complete.
Instead of looking at your income or the current income of a property, a hard money lender will look at the value of a property. This means that if you are someone looking to flip a property, or use the BRRRR method, you can use a HML to buy and renovate a property before later refinancing it through a traditional mortgage.
When Would It Make Sense?
Say you wanted to start flipping homes, and a $200k house comes up on the market that you think would be great to flip. Looking at the comparable homes, if it was updated, it would sell for $300k, and would cost $50k to renovate.
If you don’t have a high enough salary to support the second mortgage, a bank will not lend you the money for the flip. Instead, you can reach out to a hard money lender for a short term 3 month mortgage on the property. This would give you two months to complete the renovations, and a month to allow the house to sell. The hard money loan might cost you around $3.5k in interest, bringing your total costs to around $253.5k. After selling the house for $300k, and having closing costs of around $5k, you will be left with a profit of $41.5k.
In the example above, it makes sense to take out a hard money loan because while it is a significant expense, it is necessary to complete the project.
Where Do You Find Hard Money Lenders?
Hard money lenders are usually wealthy individuals, or private funds that manage and invest into mortgages. You can try reaching out to a mortgage broker, join local real estate investing networks, or speak to a real estate agent who may have a connection.
This article is for informational purposes only; it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
