Are you interesting in flipping homes, but afraid that you don’t have enough money to get started? A hard money loan is an essential tool for investors to understand because of the integral role that it could play in their real estate investments. For most, this method of payment typically falls under the “last resort” category or is only seen as short-term bridge loan. Due to the negative connotations associated with this method of lending, individuals may be dissuaded from tapping into the benefits that a hard money lender can offer, these are the misconceptions about hard money.
While there are a small minority of companies that give hard money a bad reputation, there are numerous lenders that showcase all the benefits that come with hard money loans. Individuals tend to be turned off due to the misconception that hard money lenders are not legitimate sources of financing.
First, it is crucial to understand that hard money lenders act the same as a bank because they have been established to lend money. Hard money lenders are typically asset based, meaning they secure their interest in the deal by placing a lien on the property they are lending on. When it comes down to it, individuals do not have to jump through as many hoops with a hard money lender as they do with a bank. Because the potential deal is between the investor and the lender, the lender usually sets more common-sense underwriting guidelines and vet the deal so that they are certain that their borrower will be able to pay at the end of the loan term.
One of the key components to focus on within real estate investing is the numbers that you are presented with. Unfortunately, hard money loans and lenders tend to intimidate and or scare off real estate investors because of the high cost, rates, and limitations that they assume will come along with the loan. Depending on the borrower and the property at hand, many hard money lenders are willing to take the risk with a flipper, in fact, some even specialize in this area. However, because of the risk, usually rates are higher than a standard residential loan. Although these numbers may invoke fear, hard money loans still provide a much-needed source of funding that will still allow the investor to make money on the deal.
On another note, flippers who pursue the idea of working with a hard money lender know that their chances of working with a traditional bank are slim. This may be because of their credit history or failure to provide the required amount of income needed for a loan. While these are issues that can be risky for banks to deal with, this is where a hard money lender can save the day. At the end of the day, real estate investing all comes down to the numbers that are necessary to meet the requirements.
Lastly, while many investors may think hard money lenders provide 100% financing for a deal, it is very rare that a hard money lender will cover the amount in full. Hard money lenders will usually provide a certain percentage of the loan so that the investor is held responsible for contributing to part of the loan. This is to ensure the investor has some skin in the game, meaning the hard money lender will receive payment in the end.
Overall, investors may be hesitant to proceed with hard money due to general misconceptions passed by word-of-mouth, lack of knowledge, and or fear of stepping away from what they know. Reach out to RCN Capital if you have questions regarding hard money loans, need funding for your next real estate deal, and to see what a hard money lender can offer!
This article originally appeared on the Mortgage Professional America website, Misconceptions About Hard Money. View the full article here.