Hard money loans are a form of bridge loan secured with a physical asset. Like all bridge loan formats, they’re designed for short-term working capital loans, which makes them ideal for raising investment capital for short-term projects with definitive end dates. As a result, many real estate investors use them for rehabilitating and flipping properties. Most hard money loan structures are built with interest-only payments throughout the loan term and a final payoff that includes the entire principal, minimizing the cost of maintaining the loan while a property is being improved and marketed.
Advantages of Using Hard Money
Secured debt is quite a bit cheaper than unsecured debt, especially when you’re dealing with the sums needed to purchase properties. By using an asset you own to finance the loan, you reduce the risk to the lender significantly, which makes the lower interest rate cost-effective for both parties. In the event of default, the lender can foreclose on the collateral and sell it to recoup costs. As a result, investors need to be sure the loan term will be long enough to find a buyer after finishing the work on the property.
Many hard money loans designed for the real estate industry allow the borrower to secure the loan with the asset being purchased, which limits the risk to your portfolio in the event of a foreclosure. These are generally popular with house flippers, but they are not the only option. Many lenders also allow you to use properties you hold for long-term income, provided the property has equity to support the loan. This is often an option used by established investors because it allows you to access the capital needed to handle the purchase, the improvements, and the costs of remarketing the improved property. It’s not an option that everyone has the assets to support, however.
Learn More About Hard Money Loan Options
While you can get short-term capital loans with terms as long as three years, most real estate investors opt for loans that are between 6 and 18 months. If you’re not sure how long you’ll need to flip a property, look for a lender that offers loans with no prepayment penalty. That way, there’s no disadvantage to taking a longer loan term if you wind up ready to pay it down early. It’s a best of both worlds scenario. For more advice like this, talk to a hard money loan expert about your options for financing the next property you flip.