A hard money loan is not to be taken lightly. An investor who is considering any hard money loans should make sure they know all of the aspects of these types of loans.
What is a hard money loan?
This term refers to a type of loan that is highly collateralized, usually with real property, where the LTV (loan to value) is anywhere from 60 to 80 percent. These loans usually do not require any credit on the part of the borrower as the property itself is what secures the loan. Residential hard money loans are usually very high interest rate loans, anywhere from 12 to 21% and in some cases even higher.
So why in the world would anyone want such a high interest rate loan?
This strategy is not for the faint of heart. These loans are risky, especially if you don’t know what you are doing. They can be of absolute necessity, though, if you have a great deal at hand but you don’t have access to cash or credit. These loans may be the only option to secure a fantastic deal that would otherwise slip through your hand.
The good news:
The great thing about a residential hard money loan is that you could theoretically buy a limitless number of houses. As long as the house itself could support the requirements of the loan e.g., the loan to value, then you can buy as many homes as you can find deals. Obviously you ability to manage the logistics will be the limiting factor. I believe this is one of the main techniques the late night real estate millionaire gurus use. They make is seem as though it is a simple strategy that anyone can use.
The other news:
I hesitate to say bad news simply because if you know what you are doing, the things that could be potentially bad won’t bother you. The ultra high interest for example means nothing to someone who has done hundreds of deals, and has a whole team of people frothing at the mouth for a good real estate deal. You may only control the property for a few days or less, so who cares how much the interest is. Ultimately you will factor in all of the numbers and they either work or they don’t, it won’t really be a risk.
If you can master the hard money arena you could make a fortune. Once you get comfortable investing and your team is in place, then there is no reason you couldn’t add a hard money loan to your tool chest.