Real estate investing is an incredible journey. However, it’s anything but a straight line. To succeed, you need to find the right property, secure the financing to purchase it, and get your offer accepted above other bidders. And that’s just the beginning.
Throughout this journey, one thing is certain: speed and flexibility count, and when you need to get a deal done, there’s no space for “maybe.” Enter the hard money loan. For new and seasoned investors, this financing structure can be a game-changer when it’s time to fund your investment deal.
What Is a Hard Money Loan?
In the most basic sense, a hard money loan is a short-term loan secured with real estate. Unlike a mortgage with relatively easy approval requirements, for which the lender looks at your income, credit score, and long-term ability to pay back, this type of loan is focused on real estate and, more particularly, the property’s value.
Often, the lender will loan you a percentage of the “after repair value” (ARV) of the house. That means the estimated value post-renovation. This type of loan is used by house flippers, landlords, and others who wish to purchase a property quickly without the time for a long-term mortgage. Click here to learn more about this financing route.
Why Use Hard Money?
While long-term mortgages are fantastic for the “buy and hold” homeowner, they are far too slow and cumbersome for real estate investors who live for their ability to finance and close on properties quickly. Mortgage lenders may take weeks or months to approve your loan, and they often require documentation.
But with a hard money loan, it’s possible to close in days. In a fast-moving real estate market, speed and flexibility matter. With it, you can expect:
- Speed of approval, often within hours of your application
- Speed of closing, typically under five to 10 days
- Fewer qualifications than more traditional loans (lower credit score, lack of W-2 income, etc.)
The borrower is important, but not nearly as important as with a traditional loan. For this reason, hard money lenders can be more flexible compared to a traditional mortgage lender. This can be incredibly appealing to investors.
Typical Uses for Hard Money Loans
A hard money loan isn’t useful in every situation. For example, if you need long-term financing, have years to close on your project, or are looking for very low interest rates for your loan, it really shines in these scenarios.
House Flipping: Hard money lenders are great for house flippers. You find a property, finance the purchase, rehab the property quickly, and turn around and sell it. You do all this within your brief loan term (typically 12 months or less), so you can pay back the loan.
BRRRR Method (Buy, Rehab, Rent, Refinance, Repeat): It allows investors to move quickly. You use the hard money loan to cover the purchase and rehab. Then, you refinance with a conventional mortgage, taking out the cash to do it all over again.
Auctions and Off-Market Deals: Cash wins at auctions, and with this type of funding, you get a cash-like advantage. That makes it a lot easier to compete with hard money investors who are always ready with cash. That saves you a lot of stress and time, and gets you the property.
How It Works
They’re usually easier than bank loans. Here is how the process works:
- Apply for the loan: Tell the lender the details and property address
- Lender assesses the property: They focus on ARV and your exit strategy, as mentioned above
- Loan terms are given: This is where you get the loan amount, interest rate, fees, and timeline
- Closing: You can close in as few as 1-2 days
Typically, hard money lenders require a down payment, usually 10-30% of the purchase price. They’ll also want to know how you intend to repay the loan, either by selling the property or refinancing.
Pros and Cons
There are few perks and downsides that can help you decide whether or not to go this funding route.
Pros
- Quick approval
- Minimal paperwork
- More flexible with credit
- Focuses on property value
Cons
- Higher interest (though usually 8-15%)
- Shorter terms (usually 6-18 months)
- Upfront fees or points
That said, when you use them right, these loans aren’t a last resort. They’re a workhorse, an option that can get the job done well and on time. For a more detailed explanation, follow this resource: https://www.business.com/.
What to Look For in a Hard Money Lender
Not all lenders are created equal. Try to find one that’s upfront about fees, interest rates, and timeline. Some are tailored to fit newer investors, while others cater to experienced flippers. You’ll want to see these green flags before making a choice:
- Transparent talk
- Quick processing
- Fair terms based on ARV
- Support during the rehab
The right lender won’t just lend the money; they’ll partner with you.
Who Should Use Hard Money Loans?
Again, these aren’t for everyone, but they do make sense for people who:
- Are working on their first house flip
- Don’t have the cash on hand to get all the way through with a BRRRR
- Buy undervalued or auction properties
- Need a loan to close quickly against fully financed offers
For investors with tight deadlines, running out of time or needing flexibility on another deal, a hard money lender can provide relief where traditional banks will not.
Conclusion
If you’ve been around the real estate investing block any length of time, you know speed trumps cheap and easy every time. Deals die when you can’t get them funded quickly. Delays on a rehab bring costs that cut into your bottom line. And waiting for a conventional lender to get off the fence causes you to lose out on properties.
Access to hard money loans puts the leverage, speed, and control on your side. When you use them wisely, the benefits will trump the downsides. Ready to make your next real estate deal work for you? The time to make the move is right now.
