There is money to be made in real estate, as has been shown over the decades by this top-performing asset class. Sometimes, however, it takes a large sum of money to get the property you have your eyes on. Indeed, it can be difficult if your credit rating is less than stellar. This is the type of situation where hard money loans can be useful.
Hard Money Loans: A Primer
Hard money loans are a specific form of asset-based lending. They are short-term loans, generally obtained to finance commercial projects. Different from many other loans, hard money loans are backed by the value of the real property instead of the credit rating of the borrower. If the borrower defaults on a hard money loan, the asset used as collateral will likely be seized and liquidated.
Because of a perceived increase in default risk, hard money loans typically have a higher interest rate than other loan types. The average hard money loan comes with interest rates in the 11% to 18% range — well above traditional loan rates. Most hard loan borrowers will have to make high monthly payments that they must be accountable for.
Alternatives to Hard Money Loans
Hard money loans can be expensive for the borrower, and in many cases should only be pursued as a last resort option. ALternative fining such as a loan that does not utilize collateral, i.e. an unsecured loan, may be a better bet. In certain real estate situations, such as with fix-and-flip projects, a fix-and-flip loan may be much more cost-effective as well.
Should you have an interest in hard money loans or another form of property financing, Partner with the Hemingway Financial Group.