It’s officially 2022 and with a new year comes new opportunities. A goal of 2022 may be to generate more income or to grow your investment portfolio so you may be curious about hard money lending. What is a Hard Money Loan? What are the Pros and Cons and when should you use a Hard Money Loan? 

What is Hard Money? 

To get down to the basics, we need to know what is hard money? Hard money often refers to a currency that is made up or directly backed by a valuable commodity or hard asset. 

What is a Hard Money Loan? 

A hard money loan is a type of loan that is secured by real estate that may be more difficult to acquire with a traditional lender. Typically, used by real estate investors, property flippers and real estate developers. The property will be considered the collateral. 

In real estate transactions, a hard money loan is granted by individual investors or private lenders because these properties are considered riskier. 

Since risk is a larger factor, hard money loans come with higher interest rates and can be more expensive because it can lead to a financial burden if the borrower defaults. 

What are the Pros and Cons of Hard Money Loans? 

Pros of Hard Money Loans 

  • Fast approval process 
  • These loans can close quicker than traditional loans 
  • Flexible and less stringent underwriting process 

Cons of Hard Money Loans 

  • Higher interest rates 
  • Conservative to Loan-to-Value ratios 
  • Lender faces considerable risk 
  • Lender may not provide financing for owner-occupied residence because of property rules and regulations. 

Examples of Hard Money Loan Borrowers 

1. Fix and Flip 

Real estate investors that are property flippers seek hard money loans to fund their future projects and provide the project as collateral. In addition, the loan is generally based on 90% of the purchase price and 100% of the rehab costs. 

2. Fix and Rent 

Some real estate investors are seeking long term revenue streams so they may seek a hard money loan for a property that needs to be rehabbed and then rented after. The initial acquisition loan will be like a fix and flip but it will be refinanced for a longer term once the actual project is completed. This ensures the best after repair value to maximize the cash out refinance. 

3. Wholesale Funding 

Since hard money loans can be obtained quickly, wholesale funding is beneficial because it can be used instead of contract assignments and does not allow the buyer and seller to know your financial spread. 

If you’re looking to develop a relationship with a new hard money lender, reach out to local real estate agents or investor groups. We recommend discussing your needs and long-term strategies with your lender to ensure they offer the right programs to suite your goals. Coastal Equity Group is a leading Hard Money Lender in the Southeast and is ready to serve new and experienced investors.