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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.