Online Calculator | Real Estate Investing And Hard Money Loans

Real Estate Investing And Hard Money Loans

Many of the so called real estate “gurus” out there preach the value of using OPM (other people’s money). They say it’s best to use other people’s money to defer risk, but really it’s because they want people without money to invest in real estate. In my opinion, if you don’t think a real estate investment is good enough to use your money, you probably better not ask others to invest their money. Anyways, that’s a different subject, this article is focused on the wisdom of using hard money.

Hard money loans are privately funded loans that have high interest rates and high origination fees. These loans are “hard” because they have very strict terms and expensive fees. It’s not cheap to get hard money financing. They usually have an upfront origination fee of 3 to 4 points, plus double digit interest.

The primary difference between hard money lending, and other types of lending, is the subject criteria. The focus on traditional mortgage loans is the borrower. Traditional lenders only approve borrowers with good credit, low debt, and consistent income. Hard money lenders place their emphasis on the value of the real estate. When the value of the property is worth significantly more than the amount financed, hard money lenders will typically grant financing. If the borrower is unable to pay back, they have no problem foreclosing and aquiring the property that is worth substantially less than what was paid for it.

Hard money loans can be useful, and can be very valuable for investing in real estate. Many foreclosure auction and other deals need financing very fast. They have to finance the property in a matter of days. Good California hard money lenders are able to fund money in a very short period of time. If it is a good investment, despite the high borrowing costs there can still be a significant profit. The important factor is the net profit, not the costs spent.

Lets say a real estate investor borrowed $100,000 at 10% interest, flipped a property, and then sold it for $140,000 six months later. If up front they paid three points that would be $3,000, plus $6,000 in monthly interest. They may have paid the hard money lender $9,000, but they still would have a profit of over $30,000.

Hard money loans can be a good source of short term financing for savvy investors, but because of the high costs it should only be used by very cautious borrowers.

Filed Under Online Calculator | Leave a Comment

Tagged With , , ,

Comments

Leave a Reply