Are hard money loans legal?
In short, yes, hard money loans are legal.
If you visit a real estate investor meetup, you’ll notice hard money lenders have mixed reviews. The industry does seem tarnished by some predatory lenders who take advantage of newbie investors -- however, the majority of hard money lenders are legitimate businesses and investors looking for real estate projects to fund in exchange for a decent return on their money.
Like any lender, there are restrictions on the type of deal a hard money lender is interested in funding and it’s important to know what types of loans a hard money lender won't fund.
Are hard money loans a good idea?
With so many funding options for real estate investment deals, are hard money loans a good idea?
The answer has a lot to do with the hard money lender that you're considering. Look for these things in a lender:
- Extensive experience with the type of loan you’re seeking.
- Reasonable interest rates and fees. Hard money lenders aren't subject to the strict requirements that traditional financial institutions are held to, so conduct your due diligence. Compare interest rates and loan fees to be sure you’re getting competitive terms.
- Enough funding for your loan. I've heard stories of lenders who didn’t have the promised cash available for a scheduled draw. This is a big problem, as finishing on time is crucial for most investors.
- A good reputation. Check those online reviews. Ask other investors for recommendations and if there are lenders you should avoid.
If you can find a reputable lender with good terms, hard money loans can be a good idea. Just make sure you know what you're getting into and that you can repay the loan quickly after your fix-and-flip.
How to improve your chances of qualifying for a hard money loan
Like any loan, you'll need to apply and be approved for a hard money loan. While your credit score doesn’t qualify you for the money, a good one tells a hard money lender that you’re a lower risk.
Most hard money lenders require rehab and real estate experience. Providing proof of your qualifications as a successful real estate investor will help your chances of loan approval and put you in a better position to negotiate a favorable interest rate.
Another thing to remember: Like traditional lenders, hard money lenders require property insurance. But, in most cases, you’ll need a builders risk policy rather than the more affordable property and casualty insurance a traditional mortgage requires. It’s more expensive, has unique coverage, and not all insurance brokers offer it.
Are hard money loans worth it?
Real estate investing is an expensive endeavor. Properties are expensive assets to buy and sell and to get the best deals, you need ready access to a lot of cash. Hard money loans have been around for decades because they provide a great source of funding for shorter-term real estate ventures like fix-and-flip properties. Using hard money can give investors leverage to do bigger deals and using leverage wisely is key to building wealth.
Real estate investing is all about the numbers. The cost of a hard money loan or any other form of financing, if you don’t have buckets of cash sitting around, is just another cost that needs to be added into your calculations when determining if the deal will deliver the profit you need to meet your investing goals.