Understanding the pros and cons of becoming a hard money lender

Real estate investing is a popular way to make money, but only some people want to buy and flip properties or hold them for long-term rentals. If you’re looking for a different way to invest in real estate or want to diversify your investments, becoming a hard money equity lender may be worth considering. This article will discuss the basics of hard money lending, the pros and cons, and what you must consider before becoming a lender.

What is Hard Money Equity Lending? A hard money or private money, or home equity lender is a non-institutional individual or company that provides loans to real estate investors to purchase or construct properties. Unlike traditional banks, hard money lenders focus more on “hard” assets, real estate properties, than the borrower’s ability to pay, as indicated by income or credit score. A lien on the property is used to secure hard money loans and can be used for fixes and flips, new constructions, or to purchase and hold residential or commercial properties.

Pros of Becoming a Hard Money Lender Here are some of the benefits of becoming a hard money lender:

1. High Returns on Investment – Hard money lenders can expect a relatively high return compared to bank investments or bonds.
2. No Physical Labor Involved – refurbishing and building is someone else’s problem. This may be a better fit for you if you’re more comfortable with financial management and lending.
3. Margin of Safety – Hard money lenders typically lend 35% to 45% LTV, providing a margin of safety. If the borrower defaults, you can foreclose on the collateral to secure the loan.

Cons of Becoming a Hard Money Lender Here are some of the drawbacks of becoming a hard money lender:

1. Requires Capital – Becoming a hard money lender requires significant capital. You need to have money to lend and be able to cover expenses in case of borrower default.
2. Limited Returns – While returns can be attractive, lenders only make money on the interest. If a project is super profitable, all the upside goes to the borrower who took the equity risk.
3. Lack of Standardization – Hard money lending lacks standardization, which can be both a pro and a con. With fewer requirements and paperwork, the borrower default is a real risk.
4. Government Regulations – Government regulators can update the rules in ways that affect hard money lending. It’s essential to stay on top of federal and government regulations.

Is Becoming a Hard Money Equity Lender Right for You?

Before becoming a hard money equity lender, it’s essential to consider your goals, strengths, and what you need help with. If you have the industry knowledge to evaluate deals, can assess properties well, and have a way to raise capital, hard money lending may be a good fit for you. However, you may have better options if you want higher returns or to be more involved in rehabbing and building.

Conclusion

Understanding the pros and cons of becoming a hard money lender can be a lucrative way to invest in real estate if you’re willing to take risks and have the capital to invest. Before jumping in, please ensure you do your homework and fully understand the pros and cons. Doing so lets you determine if becoming a hard money lender is your suitable decision.

-Written by Glenn Tellier (Founder of Grupo Gap)

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Frequently Asked Questions

What is hard money equity lending?

Hard money equity lending is a type of real estate financing where a non-bank individual or company provides loans to real estate investors to purchase or construct properties. These loans are generally secured by a lien on the property and focus more on the value of the property rather than the borrower’s credit and ability to pay.

How is hard money lending different from traditional bank lending?

Unlike traditional bank loans, hard money loans are usually short-term and are based on the value of the property rather than the borrower’s creditworthiness. Hard money lenders are generally more flexible and can provide loans for properties that banks may not finance.

What types of properties can I use hard money loans for?

Hard money equity loans can be used for various properties, including residential and commercial properties, fix and flip projects, and new constructions.

How long are hard money loans usually for?

Most hard money loans are short-term and typically range from six to 36 months. However, some lenders may offer longer-term loans.

What are the interest rates for hard money loans?

Interest rates for hard money loans are typically higher than traditional bank loans and can range from around 12% to 16% or more. However, the rates can vary depending on the lender and the property.

How much can I borrow with a hard money loan?

The amount you can borrow with a hard money loan depends on the property’s value. Most hard money lenders will lend up to 65% to 70% of the property’s value.

How quickly can I get a hard money loan?

Hard money equity loans can be funded much faster than traditional bank loans. Some lenders can fund loans in a few days to a few weeks.

What are the pros and cons of becoming a hard money lender?

Like any investment, becoming a hard money lender has pros and cons. Hard money equity lending carries risks. The main risk is borrower default, which could result in a loss of your investment. Do your due diligence and thoroughly evaluate the borrower and the property before lending money.

Article by Glenn Tellier (Founder of CRIE and Grupo Gap)