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What is a hard money loan? This 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. A hard money loan, usually taken out for a short time, is a way to raise money quickly but at a higher cost and lower LTV (Loan-to-Value) ratio.
Because
hard money loans rely on collateral rather than the financial position of the
applicant, the funding time frame is shorter.
Terms
of hard money, loans can often be negotiated between the lender and the
borrower. These loans typically use the property as collateral. Default by
the borrower can still result in a profitable transaction for the lender
through collecting the collateral.
If
you flip houses a hard money loan is a particularly good tool for scaling your
investment properties in other words, taking on projects incrementally, with
strategic loans that allow you to rehab with little money down. A recommendation is hard money loans for fix and flips because they minimize
the amount of money a flipper has to personally sink into a property. There are
certainly a lot of costs involved in flipping a property for the resale market:
borrowers have to consider the purchase price of the property, what the
renovation costs will be and plan for emergencies.
A
hard money loan sometimes referred to in this context as a fix and flip loan can
empower a new flipper working on one flip, or bolster a seasoned rehabber
working on a few simultaneously. Hard money loans can be used for various
property investment projects, but today I am talking about one in particular: a
fix and flip project, financed with a hard money loan.
Lenders believe 75% of the ARV is the sweet spot for
a total loan amount. At any higher percent of the ARV, the loan can border on
being financially unsustainable in the face of an emergency, though there are
safeguards for higher-value loans that we will touch on in a minute.
They would be excited to see you proposing a loan
closer to or below 75% of your ARV. This value range makes the loan more
stable and allows the borrower lots of potential equity because you have more
room to make a profitable deal upon listing your finished fix and flip on the
resale market. Before purchasing a fix and flip property, be sure you set your
own financial expectations for the loan and collaborate with your hard money
lender to ensure they are realistic for all parties involved.
Hard money is a powerful tool for property
investors. However, with power comes responsibility! A hard money loan doesn’t
necessarily guarantee a large profit margin, or in a worst-case scenario, any
profit. Yet it does guarantee a second set of eyes on your financial status and
rehabbing plans, which can be a major factor in your success. To learn more about what
is a hard money loan is and decide what is best for you.
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