Understanding the range of independent and alternative financing options for your next working capital loan is one of the most important parts of learning to invest in real estate. Unlike many other areas of investment, property investors tend to finance the cost of the deal as much as possible, because it helps offset the risks involved with buying and selling high value assets. One of the most common types of loan offered by private lenders is the hard money loan, but since there are a variety of ways that hard money loans present, it can be hard to find the right one when you’re just getting started.
What Is Hard Money?
The easiest way to understand the range of products that use this label is to view it as synonymous with the phrase private money. Investors back lending firms that offer credit products, including loans, based on their available capital, with the interest and financing charges paying the costs of doing business and providing the investor’s profit. In fact, the phrase hard money refers to the fact that the capital involved is investor-owned and not borrowed through treasury programs or underwritten by traditional banking institutions. As a result, there are hard money loans out there for a variety of industries, and they’re all very different from one another.
Real Estate Bridge Loans
When you use a private lender to fund a short-term real estate investment, the smart move is generally to find a loan you can secure with the property in question, it lowers the interest and reduces the capital you need. The issue most of the time is that traditional real estate loans with fixed rates and amortizing payments are designed as long-term instruments, so they take a while to approve and they require hefty down payments. Hard money bridge loans, on the other hand, often close at or above 90% of LTV, with many lenders offering loans with no down payment required for short terms like six to twelve months. The payments during that term are interest-only so you can put your capital into the improvements, and after reselling the property it’s easy to pay off the loan and pocket the profit, so hard money loans are a core part of many investment models.
Additional Hard Money Loan Products
Outside of real estate, you might see hard money products pitched as working capital loans for manufacturing, retail, or other sectors of business. Typically, these products are set up as working capital loans, often unsecured ones, and as a result they tend to be much more expensive than bridge loans from private lenders. Understanding when you’re looking at a hard money loan product that’s not aimed at real estate investors is an important part of finding the lenders that work for your investment strategy.