You are a new property investor just getting started. One of your first questions has to do with financing. You have heard about hard money lending and bridge loans, but you wonder whether these are the right way to go. Guess what? You are not alone. You’re actually part of a fairly big club.
Property investors are subject to a lot of misinformation regarding hard money lending. For example, it’s common for them to believe that hard money is the last resort. The thing about this line of thinking is that it is not true. Not only is hard money not a last resort for property investors, but it should also be the first choice for certain kinds of deals.
If you are new to property investing, here are five things you should know about hard money lending:
1. Lenders Are Similar to Banks
Though hard money lenders differ from banks in their lending criteria and underwriting practices, they are similar to banks in other ways. For example, hard money lenders are established businesses that are both licensed and bonded. They must adhere to many of the same requirements imposed on the banking system, such as the requirement for full disclosure. Despite what you might have heard, borrowing from a hard money lender does not mean borrowing from a shady character working out of a back-alley office.
2. Lending is Asset-Based
The biggest difference between a bank and hard money lending is underwriting. Hard money lenders base their underwriting on assets offered as collateral. In the case of a real estate investor, the collateralized asset is generally the property being acquired. Loans are based on the value of the property and its current marketability.
3. Liens Are Placed on Collateral
Next up, hard money lenders protect their own interests by placing liens on whatever assets are offered as collateral. Perhaps you intend to make your money flipping houses. Expect your lender to place liens on every financed property. Those liens will remain in place until outstanding loans are paid in full. Should you default, the properties will be foreclosed on.
4. Lenders Can Work More Quickly
Smart property investors appreciate hard money loans for a variety of reasons, not the least of which is the speed at which they can be obtained. What takes a bank week to do can be completed in days by a hard money lender. In some cases, loans can be approved in hours.
What must be understood is that hard money lenders do not require borrowers to jump through hoops. There is considerably less administrative work involved, less paperwork to fill out, etc. Hard money lenders rely on a streamlined application process that gets deals done quickly.
5. Loans Can Be Customized
Finally, loans from hard money lenders can be customized to meet the borrower’s needs. For example, consider Salt Lake City’s Actium Partners. Though the firm does have basic lending criteria that provides a foundation for their deals, that criteria are flexible enough to allow for generous modifications. The firm can generally work within most circumstances to come up with a deal everyone is happy with.
The advantage enjoyed by hard money lenders here is found in the source of funding. Hard money lenders put up their own money where banks rely on customer deposits to fund their loans. The result is that hard money lenders are more flexible while banks are forced to be more rigid.
If you are new to property investing, learn everything you can about hard money. It could turn out to be your best funding source.