When people buy a home and need to borrow money, they typically only have one source: a mortgage from a bank, credit union or financial services company. But those looking to invest in real estate, whether it be residential or commercial, often can tap another source: hard money mortgage lenders.
The term “hard money” refers to a specific type of asset financing that is usually used in commercial real estate investing. Hard money loans come from private financiers, which could be pension funds, hedge funds or private individuals. Some companies exist to pool investor money and make hard money loans. Hard money loans usually have short durations of one to five years and are similar to a bridge loan. They are not meant to be used as permanent financing, because they usually carry very high interest rates.
Hard money loans require securitization, which usually is in the form of a piece of property. Whereas a homeowner can get a mortgage with as little as 3% to 5% down, most hard money mortgage lenders won’t lend more than about 70% of a property’s value, requiring the borrower to have significant equity. That helps protect the lender against default because if it has to foreclose on the property, it will be less likely to take a loss on the sale.
Another thing that protects hard money mortgage lenders is the high interest rates they charge. Such loans can carry rates that are double or triple standard commercial loan rates. Rates can easily be 15% to 18% or even higher. That makes hard money loans more likely to be used by owners of distressed property. Those owners often take these loans in hopes of keeping the property afloat so it can sell. Hard money rehab loans are used to make needed improvements or repairs to a property to get it ready for sale.
Another thing that makes hard money loans attractive to people involved in commercial property investing is their relatively quick turnaround times. You can get a hard money loan in as little as a week, whereas most standard commercial loans can take weeks to finalize. If a property is in trouble, getting money fast could mean the difference between success and failure.
Hard money loans for real estate investors can be a good deal, but they should be a last resort. Their high interest rates make them not a good option for investors who can get cheaper funds for other sources.
