What Is Hard Money Lender Investing and How Does It Work?
The first step of breaking down commercial real estate financing covers the basics of understanding hard money lender investing. After all, there are many types of loans, but the quickest path to securing a commercial real estate deal is hard money loans (also known as private money loans). Naturally, a hard money loan is an investor’s dream.
But, much like most commercial real estate financing, investing in hard money lending can quickly get complicated. Before making any investment decisions, it’s crucial to comprehend what you are getting yourself into fully.
In this article, we’ll explore what hard money lender investing is, including the pros and cons, how to get started in it, the different types of investments you can make, and examples of successful investments in this sector.
What Is Hard Money Lending?
The term “hard money” often comes up with commercial real estate investors looking for alternative financing options that don’t involve their local bank.
Private investors or individuals involved in hard money lending are providing short-term loans. This form of commercial real estate private financing typically has more lenient approval criteria, although the terms tend to be more strict than traditional financing.
Investing in hard money lending refers to a lender acting as an investor. This individual typically charges higher rates than traditional banks but also makes loans that banks would not make. These loans are secured by real estate and are known for requiring less documentation and being funded more quickly than traditional banks.
How Does Hard Money Lender Investing Work?
For a borrower looking for collateral for their loan in the form of their real estate investment, a hard money loan is another way to lend money as an alternative to a conventional loan. The credit history of the borrower is often not a factor in these loans, unlike a traditional loan. Instead, the property’s value is the only thing hard money loan investors look at.
The borrower can obtain the funds needed more quickly and easily on a hard money loan in exchange for higher interest rates. Property investors will tend to borrow hard money when they have a good amount of equity in a piece of real estate and poor credit.
Benefits of Hard Money Lender Investing
Hard money lending can be beneficial to both parties involved. Here’s a quick look at what to expect as a borrower and lender.
There are many benefits of hard money lending, including:
- Self-employment is not seen as a road bump in the lending process
- Credit score does not play a role, only the merits of the specific deal
- Borrowers avoid the humiliation of rejection from banks
- Less time is spent seeking financing options
- Personal financial situation under significantly less scrutiny
- Overall more simple and quick application process and decision
Of course, hard money investing is also beneficial for the lender. Here’s how:
- Profits through interest payments
- Opportunity for borrowers to buy points for a lower interest rate
- Agreed upon exit fees (typically a percentage of the cost of the investment)
- Potential for joint venture agreements
- Terms are more flexible
How to Get Started in the World of Hard Money Lending
For people who have extra cash readily available, hard lending money can be a way to generate income. As with any business venture, make sure you are assessing your risk and performing your due diligence ahead of time. If you believe this is a business venture that may be of interest to you, follow these steps on how to invest in hard money lending:
- Start by creating a name for your business and begin forming your company
- Set your business up online with a proper website
- With the help of an experienced real estate attorney, start creating an LLC (limited liability company)
- Begin exploring the different investment opportunities
- Design a business plan for your business, including guidelines for borrowers on how to get a loan
- Make projections on the potential returns when presented with a loan opportunity
- Start doing business as a hard money lender
Things to Keep in Mind When Investing in Hard Money Loans
You act as the bank to investors when you are a private money lender. You can fund the investment, but it will ultimately be owned by other investors. While the benefits are easy to see, there are a few things to remember before diving in.
Here are a few pointers from the pros:
- Learn about the types of deals you want to invest in
- Stay informed about current market conditions
- Don’t inflate your business ventures or experience
- Find local clients you can meet in person
- Hire an experienced real estate attorney
- Start with a comfortable range of small loans to fund
Different Types of Investments You Can Make with a Hard Money Loan
You will encounter different categories of borrowers as a private money lender. They all need a loan but will have various reasons for needing it. Here are some of the investments you can make with a hard money loan.
- Commercial properties
- Property development
- Rehab a property to rent
- Rehab a property to sell (also known as flipping)
Examples of Successful Hard Money Lending Investments
You have the opportunity to use hard money loans frequently as an investor. There are nearly countless examples of successful hard money lending investments. Here are a few of the primary situations to look out for:
Buy, Rehab, Rent, Refinance, Repeat (RRRR) Investors
These investors often rely on hard money loans to pay for a property’s purchase and rehabilitation. They rent out their property and refinance it with a traditional mortgage rather than selling it to pay off their hard money loan. Instead, they pay off the hard money loan with the refinance proceeds. Any remaining cash is left in the property as equity or pocketed as profit.
Fix and Flip Deals
A traditional mortgage is not an option for properties needing significant repairs. House flippers will need to find hard money to finance the purchase and repair unless they can purchase with cash. Once rehabbed, fix and flip investors will sell the property, using the proceeds to pay off their hard money loan. Any difference will be pocketed as profit.
In wholesale situations, investors find distressed properties for a steal, put them under contract, then assign the agreement to another investor to close. While it’s a simple process, sometimes cash on hand is needed. Hard money loans provide a quick, reliable source of short-term funds for wholesale deals requiring cash before contract assignment.
Conclusion: Is Hard Money Lending a Good Investment?
Now that you know how to invest in hard money loans, the decision is yours on whether or not hard money lending is a good investment. By taking the time to understand hard money on a more detailed level, you can begin forming your own opinion based on your current financial situation.
If you have the funds, hard money lender investing can be incredibly lucrative. But, as with any business venture, it’s essential to do your due diligence before diving in head first.
Thankfully, Finance Lobby is here to help. We are the first of our kind – the future of CRE financing. You can sign up today and create your personalized lending profile for free! All in a matter of seconds!