Despite the negative connotation the term “hard money lending” has — most likely due to the word “hard” — this type of lending does represent a viable, sometimes preferred, method for investors to raise capital.
The big question many investors have is what exactly are the advantages of raising hard money. And do the advantages of securing financing from a hard money lender outweigh the potential downsides of borrowing from this source of investor capital.
So, here’s a quick rundown of some of the key advantages to using hard money lending to fund your next property acquisition.
The Benefits of Hard Money Lending
1. No Mortgage Red Tape
Getting a loan for an investment property with a traditional mortgage is difficult, it not impossible. The first issue most real estate investors run into is verifying their income, a challenging task if you operate as a self-employed entity.
Another challenge is that the amount you can borrow is based on the appraised current value of the property. (What it’s worth before doing a single repair.) If that weren’t difficult enough there are also insurance issues, and down payment considerations, that can derail your funding.
As anybody who has purchased a home this way a difficult loan process is the norm, rather than the exception. Hard money loans avoid this step altogether, and can get you into many more deals throughout the year.
Once you establish a relationship with a hard money lender and have access to capital, your business will completely change. The biggest difference is the speed you can now close deals with.
Most typical loan approvals take anywhere from 30 to 45 days. With the benefit of a cash offer, you can close as quickly as the seller will accept. Closing quickly is not only more attractive for the seller, but will help you turn more deals over throughout the course of the year.
In the time you spend waiting for your loan to be approved, you may be able to close two hard money deals during that same time. This allows you to turn more deals over throughout the year. With each deal you close, you gain valuable contacts to further grow your business. The quicker you can close, the higher the chance of your offer getting accepted.
For some investors, going through the mortgage process is a necessary evil. Instead of going the hard money route, they likely want to save money on fees, expenses and take the lowest possible interest rate.
And while there’s nothing wrong with watching the bottom line, there is something to be said for the convenience of being able to close with cash. Having to supply a lender with bank statements, income documentation, tax returns and leases can become overbearing and consume your focus and energy.
You are at the mercy of the lender and need to stay on top of everything they ask for if you want to ensure approval. The alternative is being able to close within ten days on any offer you get accepted. What you lose in fees and expenses you gain in overall volume and convenience. Which lets you focus on other things besides getting your loan approved.
4. Increased Volume
Most investors have limited funds at their disposal. Instead of taking on any attractive deal that comes their way, they are forced to wait until after they’re finished with the deal they’re currently working on.
A typical flip, from acquisition to sale, takes several months. This severely limits the total number of deals an investor can close throughout the year. Working with hard money allows you to pounce on potentially profitable deals that come your way, regardless of other projects you may be working on.
Cash deals also have more power behind them. Sellers that want to close quickly will often opt for a cash offer, even at a reduced price, over one with loan financing. Real estate agents, wholesalers and even fellow investors will notice how quickly you can close; this reputation may give you the inside track on future deals.
This is an often overlooked aspect of hard money lending. But when searching for hard money lending for real estate, and conducting yourself in a professional and confident manner, it’s possible for hard money lenders to send additional properties your way.
This is because as long as you have a solid system in place, and provide a decent expectation for a return on their investment, hard money lenders will be eager to send properties they’ve heard about your way. (As long as they get to be a part of the investment.)
But it’s not just property referrals; you can also get introduced to people who can become key members of your real estate network. Which can, of course, help you in a all areas of your investing business — financing being just one of them.
It’s Not Always About Dollars and Cents
Too often as entrepreneurs we can get hung up in how much something costs, or what the possible downside of spending money will be. But when investing things like speed, convenience, and potential aren’t just buzzwords. They are tangible things that can not only put more money in your pocket, but also put you in the best position to maximize your potential as an entrepreneur.
The key to ask yourself is: does this action put me closer or further away from my investing goals? If you can answer in the affirmative, and you’ve done your due diligence to make sure the numbers work within your system, then you might find that hard money lending opens up a whole new world of financing, deals and opportunity.