Using hard money from your business for investments

If real estate is a business investment you are considering, one of the first things you will need to do is secure funding in order to finance the costs of the property you are purchasing. One way you can do this is through hard money.

What is hard money?
Hard money refers to a short-term, asset-based loan that allows the investor to acquire financing by providing real estate as the primary asset used in their collateral. The loan is typically used to acquire property and turn it around. The hard money loan works by the lender taking a lien on the property the lender is borrowing for, and if the borrower is unable to make the payments or defaults on the loan, the lender takes the property back and sells it to repay the loan.

Hard money loans can be used for either business use or personal use and the type of real estate can be both commercial or residential.

Hard money loans differ from traditional loans in a number of ways:


• Hard money lenders are private individuals or companies. Because they are private, they do not adhere to the traditional guidelines set forth to protect lenders from high default rates. This means that those who borrow from hard money lenders don't have to meet the same credit requirements they would by borrowing from a bank.


•  Interest rates are higher. Hard money lenders tend to take on riskier borrowers; ie, those who are unable to secure financing from a bank or credit union because of credit issues, bankruptcies, and so forth. As a result, hard money lenders experience a higher default rate than traditional lenders. These higher default rates allow them to charge higher interest rates.


•  Requirements are not as stringent. Those who opt for hard money loans as a last result loan will find that they don't have to meet the same guidelines, such as income verification, credit scores, and other factors that would prevent them from acquiring traditional financing.

What are the advantages and disadvantages of using hard money for investments?
As with anything, there are a number of advantages and disadvantages to utilizing a hard money lender for your investments.

Advantages:


• Low credit. Poor credit can keep you from getting any loan, much less a real estate loan, and can take years to fix. Hard money lenders will take low credit borrowers.


•  No income verification. If you are between jobs or do not meet the income requirements to get a loan from a traditional bank, a hard money lender is an option.

Disadvantages


• High interest rates. A traditional bank will typically charge around 6-7% for a real estate loan; a hard money lender will, on the other hand, charge an interest rate of 10-20%.


•  Default rate. In the event that you do default on your property, you will also be charged a "default rate," which could be as high as 28%.


•  Limited loan-to-value ratio. In addition to high interest rates, hard money lenders will also limit the profit you make on you property, so they will still make a profit even if you foreclose. A hard money lender will take around 60-70% of the value of the property as the loan to value ratio.

A hard money loan is a risky venture that can be costly if you are unable to make your payments. However, if you can't quality for traditional financing and still want to invest, it is an option you can take. Be sure to carefully research the pros and cons of each.

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Categories: Investing, Investing Skills,

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