Debunking Hard Money Loan Myths
The following helps to debunk common myths associated with hard money loans.
• Legitimate Business – Despite what many people may think, a hard money lender is a legitimate business. They are essentially no different from a bank in that they loan money, but they are not subject to countless government regulations and rules. Hard money lenders are run as S Corps, LLCs or even Sole Proprietorships, while banks are subject to loan reviews by committees and bureaucratic procedures.
• Hard Assets – Hard money is backed by assets, which when purchasing real estate means real property. Banks follow the same rules and regulations; they simply do not refer to the collateral as “hard.”
• Profits – Yes, hard money lenders do charge higher interest rates, but they’re also taking a higher risk on individuals taking out loans. Higher interest rates do not equate to lower profit margins, it just means these numbers have to be factored into monthly carry over costs when flipping real estate investments.
• Rehab Projects – Some real estate projects require longer rehab investment periods. Investors should carefully factor over any holding costs, such as commissions, hard money interest, utilities, taxes and other maintenance-related expenses. If these numbers still come out positive after a six-month holding period, then a hard money loan may still be the best option for real estate development loans.
• Rates – Yes, hard money rates are higher, but there are two significant reasons why more real estate investors are not able to successfully obtain traditional bank financing: they have poor credit or they didn’t report income on their tax returns.
• Business-to-Business – Many legitimate businesses regularly work with a direct lender, such as a hard money lender. It does not necessarily imply that a business has poor credit and cannot work with a government-regulated banking institution. It simply means that with tighter regulations, it is becoming more difficult to obtain financing. Additionally, many small businesses are taking advantages of tax write-offs, which are beneficial, but also a negative on paper, as it makes profits appear lower.
• 100% Financing – Hard money lenders generally do not gamble by financing 100% loans. This is not always the case, but they proceed with caution because they are already taking higher risks than traditional banking institutions. Even if businesses or investors have zero money to put down, they can still use creative financing resources to successfully put deals together. For example, most investors have savings, credit cards or equity lines of credit at their disposal. These financial resources can mean the difference between looking for hundreds of thousands of dollars and tens of thousands of dollars, which can essentially make or break an investment deal.
As today’s real estate market changes, so too do the sources of investment financing.