What is a Hard Money Loan & How do they Work?
People seeking to purchase real estate as investment property normally need some form of financing to make the purchase. Very few real estate investors have enough cash on hand to fully pay for their investment, which means they need to find ways of obtaining financing in order to fund deals.
One method for financing the purchase of real estate for investment purposes is to turn to a private hard money lender. Hard money loans - also known as an asset-based lending - are a form of financing in which the borrower receives the funds on the basis that the loan is secured by the value of the investment property being purchased.
Hard money loans are different than the traditional types of loans that banks offer in that the borrower has more leverage, the ability to fund deals more quickly and therefore close faster than with a conventional bank loan. Borrowers can make a down payment of just 10% cash to buy and renovate an investment property. They can get the funds from a hard money lender in as little as 3-10 business days, allowing them to close in less than 2 weeks.
Investing in real estate is highly competitive since there are often multiple offers on the same property, which creates a bidding war among buyers. Being able to get the financing quickly gives that investor a huge advantage in these circumstances. Being able to use less of their own cash for a down payment enables them to better leverage their own money to invest in more properties. And the more properties they buy, the greater chance they have to make more in profits, which can certainly increase their return on investment.
Most hard money loans are considered short-term loans in that they last no longer than one year (with DML Lending our short-term loans go up to 12 months) with the borrower making interest payments every month until they sell the property and subsequently pay the loan off. Investment properties being purchased with hard money loans are non-owner occupied with most hard money lenders willing to lend according to the after repair value (ARV) of the home or property. The ARV is important because the lender must consider the quality and condition of the property and what the risk would be for the firm if they decide to make the loan.