Hard money lenders have become a much more acceptable and mainstream source of financing over the last few years as investors have begun to learn more about them. Experienced investors understand the advantages— whether it is quick closings, flexibility, or insider knowledge— between hard money and conventional lenders that often make hard money loans a better choice for their investment projects.
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.
Today, we set to debunk six common myths about hard money lending.
There’s No Documents Needed to Obtain a Hard Money Loan
While hard money lenders are more forgiving than conventional lenders about documentation, the basics are still important for a borrower’s loan qualification. Hard money lenders still require documentation to assess the risk associated with the project and to set loan terms accordingly, as well as to protect both themselves and the borrower from potential legal challenges. The more well-prepared you are, the faster the loan process becomes.
Hard Money Loans Cost More
In some ways, hard money loans are technically more expensive than conventional loans because they have higher interest rates and other closing costs. However, for most investors, hard money loans are simply the cost of doing business. That being said, hard money loans may save you money in other ways, especially if you subscribe to the philosophy that “time is money.” Hard money loans often have shorter terms, quicker approvals, no pre-payment penalties, and are flexible with borrowers’ timelines. Shorter loan terms also mean that you can pay off the loan faster and pay less lifetime interest. On top of that, many banks will only provide ~50-70% of the total project costs, while hard money lenders can offer up to the full amount of the purchase. So, while you may end up paying more in total expenses, you will be investing less of your own money into the project as whole.
Hard Money Loans are Fraught with Risk
Consider this: since hard money lenders are often lending their own money to borrowers, they are less likely to approve truly risky deals that will leave themselves and the borrower with less than they started with. In other words, hard money lenders have skin in the game too. Beyond that, many hard money lenders are situated where they lend, meaning that they have advanced insight into the local markets. This helps the lenders to understand when a deal is too risky or just “risky enough.” In most cases, if you and your deal look promising on paper, a bank or conventional lender will quickly approve your loan, even if in reality the project is not set up for success. Hard money lenders take time to assess your project as best they can to ensure the investment will be profitable.
Hard Money Borrowers Are Desperate
While it’s true that hard money lenders will overlook certain shortcomings in a potential borrower’s financial history/experience, like their credit score, many borrowers often come to hard money lenders with a perfectly fine credit score. Basically, most potential borrowers are picking a hard money loan over a conventional loan, not using it as a last resort. Usually, investors choose to apply for hard money loan for these two main benefits: the types of loans being offered as well as the lenders closing speed and flexibility. Experienced investors tend to acknowledge that leveraging hard money is one of the necessary tools to grow their investing business.
Hard Money Loans are Scams
Some investors looking to finance their properties rarely opt for hard money loans as they tend to think that they are scams. Any loans, even from reputable institutions can be scams if you rely on unscrupulous lenders. Whether it’s a hard money loan lender or a conventional bank, there are risks of being duped. Again, since private money lenders require equity in the property, most people think that there is something fishy. On the contrary, the equity isn’t a scam. Instead, it acts as a safety precaution for lenders guarding themselves against loss in case of defaults.
Hard Money Loans Feature Harsh Rules
Most lenders are individuals that are looking out for the investment. Ideally, they want everyone to make money. So often, the rules are quite reasonable. Also, as a borrower you can negotiate the terms, which makes both parties feel comfortable. If you work with RCN Capital, we will ensure you get your money in a timely matter with terms you feel comfortable with.
RCN Capital | Hard Money Lenders
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!
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing as well as long-term rental financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next real estate investment.