Hard money loan advantages make this type of financing very attractive. It’s ideal for commercial real estate investmentbecause of the way it works. But, for those new to commercial real estate, the term might well be unfamiliar. Or, it’s something you’ve heard of before but are unsure about what it is and how it works. Hard money loans differ from traditional financing options. They are used in commercial transactions rather than residential purchases. But, this doesn’t fully explain hard money loans.
What are Hard Money Loans?
Simply put, hard money loans are debt instruments (just like a mortgage). However, they do not function in the same ways. For instance, the funds come from a group of private individual investors or companies. The money is pooled together and used to finance commercial real estate deals.
Investing in real estate can be a lucrative avenue for building wealth, and it’s an effective way to diversity your portfolio. Real estate investment trusts (REITs) and real estate crowdfunding allow you to invest passively, but some investors may prefer to own property directly. If you’re not comfortable parting with a substantial amount of cash up front to purchase real estate, a hard money loan may be the answer. —Investopedia.com
Of course, the investors see an ROI on their cash investments, so it’s a win-win scenario. But, why are hard money loans used instead of traditional, commercial financing supplied by a bank or other entity? Well, that’s where hard money loan advantages come into play.
Hard Money Loan Advantages
Now, if there are distinct benefits to this type of funding, that must mean there are some downsides. And, this is true (although they are limited). One small disadvantage is hard money loans generally come with a higher interest rate. But, this isn’t a big deal considering hard money financing is short-term. Also, hard money loans generally require a higher down payment. However, the following hard money loan advantages seriously outweigh any negatives:
- Rapid funding. Perhaps the biggest benefit of a hard money loan is the fact its funding timeline is a fraction of traditional financing. We all know how much documentation, red tape, and other obstacles interfere with traditional financing. But, hard money loans don’t have these problems. What’s more, private investors are often quick to act.
- Flexible terms. Another unattractive factor with traditional financing are things like the interest rate, points, employment history, and so on. However, hard money lenders are more apt to work with borrowers, structuring deals which benefit both parties. That means flexible terms are often available.
- Higher approval rates. Everyone knows banks are very risk averse. But, that’s not true with a group of private investors who see opportunity. Which is another big hard money loan advantage.
- No prepayment penalties. One of the most frustrating aspects of traditional commercial loans are prepayment penalties. But, hard money loans typically don’t have such penalties and in fact, encourage early pay off.
If you’d like to learn more about commercial real estate investment benefits, hard money loans, and more about the process, please contact me.