Hard money is a vital financial resource for investors, business owners, and even property developers. But it is easy to be disillusioned by the hard money industry if you go into it with unrealistic expectations. Just know that the media doesn’t do a particularly good job of explaining just how hard money works.
Hard money is often portrayed as a funding option of last resort. Nothing could be further from the truth. According to Actium Partners based in Salt Lake City, UT, most of their clients consider hard money their first and best option. With that in mind, here are four things to know about hard money before you go looking for it:
1. It is Not Available to Everyone
First and foremost, hard money isn’t available to everyone. Far too often, articles you find online give the impression that the hard money industry is a free-for-all. Readers are led to believe that lenders are giving away money like candy. That is not the way it works.
Firms like Actium Partners are very picky about the projects they get involved with. They are very selective in terms of whom they will lend to. For instance, Actium will not invest in fix-and-flip properties. Other hard money lenders will. It is a matter of preference. One thing is for certain, though: hard money lenders do not fund residential mortgages.
2. LTVs Are Typically Lower
Traditional mortgage lenders base their loans in part on what is known as the loan-to-value (LTV) ratio. Hard money lenders do likewise. The most important thing to know in this regard is that hard money LTVs tend to be lower than what banks offer. How much lower really depends on a lender’s business practices. It is not unusual to find LTVs as low as 50%. The industry average is closer to 70%.
3. 100% Financing Is Extremely Rare
Have you ever heard an investment guru claim that you can make money in real estate without spending a penny out of your own pocket? Such claims are clearly farfetched. No bank is going to lend 100% of what you need to purchase an investment property. And contrary to popular belief, neither will hard money lenders. The fact of the matter is that 100% financing is extremely rare.
As a side note, 100% financing was possible some 20 years ago. The banking industry learned its lesson during the 2008 financial crash. They will not make that mistake again. If you are expecting to apply for a hard money loan, you had better have a significant down payment to contribute. Otherwise, you’ll probably find yourself out of luck.
4. Loans Are Short Term by Design
Borrower’s new to hard money may be caught off guard by the short terms. Know this: hard money loans are short term loans by design. Private lenders take on considerable risk when making hard money loans. One of the ways they mitigate that risk is to keep terms as short as possible. How short? A typical hard money loan offers a term of between 6 and 24 months. Extenuating circumstances may warrant 36 months.
Along with shorter terms, expect an interest rate considerably higher than you could get on a conventional loan. Once again, this is a matter of risk mitigation for the lender. Higher risk demands higher interest rates to compensate.
Hard money could be just what you need to purchase an investment property or get a construction project off the ground. But do your research. Know exactly what you are getting into before you start looking around for hard money deals.