Real Estate Investing 101 - 3
Real Estate Investing 101 is a series of articles aimed at new real estate investors wanting to learn the basics. There are so many ways in which you can invest in real estate. You can take your pick based on your interests and experience, how active or passive you want your investments to be, and how much risk you are willing to take on.
Real Estate Investing 101: Hard Money Loans
What is it? Having enough money is often the biggest obstacle to getting started for real estate investors. If you don’t have the cash in the bank to start investing, you will probably need to borrow money from somewhere. It is most common to borrow money from a bank or mortgage lender, but what if you also need to borrow money for the renovation costs or for holding costs until you can resell or refinance your investment property? Hard money loans are an alternative form of credit that real estate investors can use to fund real estate investment projects. A hard money loan can be used to purchase property, cover renovation expenses, pay for holding costs, or any combination of the three.
To understand hard money loans, you need to understand the key differences between a traditional mortgage and a hard money loan. A bank will give you a mortgage based on your creditworthiness – the size of your down payment, your credit score, and your income to be able to pay it back. A hard money lender is less concerned about these aspects, as hard money loans are secured against the property. This means, that if you can’t repay the loan, you’ll be handing over the deeds to the property. This type of loan is riskier for both the lender and the borrower, and typically interest rates are much higher.
Hard money loans are most suited to fix-and-flip projects where you intend to fix up the property and resell it in a relatively short space of time. The hard money lender will evaluate your loan application based on how much you paid for the property, your expected renovation, and holding costs, and how much you are likely to sell the property for. They want to be sure that there is a sufficient profit margin in the property for you to pay them back.
What do you need to know?
Your numbers! You need to know your numbers inside and out. The purchase price of your property, your loan repayments, your other holding costs, and the likely resale price. This is important to convince a bank or a hard money lender to lend you money and know what you can afford to borrow and still make a profit after paying everyone back.
Know the law. Laws regarding hard money lending differ significantly from state to state. Before considering a hard money loan, look at the typical terms and conditions and loan agreements.
Develop a network. Network with other real estate investors in your city, and network with them through on-line communities like biggerpockets.com. Get to know hard money lenders operating in your area. Sometimes hard money lenders are large corporations, but often they are experienced real estate investors in your area looking to fund projects.
Is hard money lending right for you?
Using hard money loans to finance your real estate investing journey can be risky if you don’t know how the loans work. If you can qualify for them, traditional mortgages are almost always the less risky option, but they are designed for the average home buyer. Hard money loans offer more flexibility and are designed specifically for real estate investors. Understand your options, and do your due diligence to make the best borrowing decision for your project.
We hope you found this article interesting and informative. Please keep reading our other articles in the Real Estate Investing 101 series to learn about more ways in which you can invest in real estate.
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