What does hard money mean in real estate?
A hard money loan is a type of loan that is secured by real property. Hard money loans are considered loans of "last resort" or short-term bridge loans. These loans are primarily used in real estate transactions, with the lender generally being individuals or companies and not banks.
Hard money refers to a currency that is made up of or directly backed by a valuable commodity such as gold or silver. This type of money is thought to maintain a stable value relative to goods and services and a strong exchange rate with softer monies.
Hard money lenders typically charge fees to the borrower for providing the loan. These fees are called “points.” Points on a hard money loan are generally equal to one percentage point of the loan but can range anywhere from 2% to 4% of the total amount loaned. Interest rates on a hard money loan can vary greatly depending on the lender and the deal. I've found most lenders will provide loans with a fixed interest rate; however, in some cases, you might be able to negotiate a floating rate. Traditionally, hard money loans carry an interest rate of 10% to 15%, depending on the lender and calculated risk of the loan.
What It Means for Individual Investors
While approval can be quick and easy, most hard money lenders keep loan-to-value ratios (LTV ratios, or the ratio of the loan value to the value of the home) relatively low. The maximum LTV ratio tends to fall between 65% and 75%, so you'll need assets to qualify for hard money.
With conservative ratios, lenders know they can sell your property relatively quickly and have a reasonable chance of getting their money back.
Hard money loans make the most sense for short-term loans. Fix-and-flip investors are an excellent example of hard money users: They own a property just long enough to improve it, increase the property value, and sell it as soon as they can.
Hard money borrowers might hope to sell a property and repay the loan within a year or so. It may be possible to use hard money to purchase a property that you want to live in. You could, but you'd want to refinance as soon as you can get a loan with lower rates and a longer loan term.
What do Private and Hard Money Lenders Have in Common?
The one thing that these two potential lenders have in common is that neither of them are restricted in the way that a traditional lending institution is.
This benefits real estate investors in a few ways:
– It’s quicker – as you don’t need to jump through as many hoops to acquire private or hard money, you can sometimes have your loan approved in less than a week.
– No credit check required – With traditional funding, your credit rating has to meet certain criteria. However, that’s not the case with hard and private lenders.
– Allow for liquidity – You’re able to leverage your own cash and stay more liquid when you’re using other people’s money (OPM). This also helps you spread out the risk rather than taking it all upon yourself.
– It’s much more flexible – Private lenders can be very creative with lending terms, whereas hard money loans don’t have any prepayment penalty. These are just a couple of ways in which these two loans are more flexible than going down the traditional financing route.