Are Hard Money Loans for Real Estate a Good Idea?

Are you looking to get into real estate investment? If so, you might consider taking out hard money loans.

But, what are hard money loans for real estate? And even more, are they a good option? In truth, it depends.

So, to give you a better idea as to whether a hard money loan is right for you, we're going to discuss its specifics below. Ready? Let's get into it.

What Is a Hard Money Loan?

A hard money loan is a short-term loan that's backed up by collateral, usually in the form of a home or rental property. Most hard money loans exist for real estate purposes, though they are available for other purposes as well.

Generally speaking, hard money loans are considered a last resort. This is because they carry high-interest rates, and can bury recipients who are not able to pay them off promptly.

You'll most typically see hard money loans taken out by those who are trying to get into real estate investment. They take out these loans as a means of buying and fixing up homes. They then try to sell those homes for more money than what they took out in the loan.

If an investor is successful in flipping and selling a home that was funded with a hard money loan, he or she will have benefited from that loan greatly. If he or she is unsuccessful in flipping and selling that home, he or she stands to incur serious debt.

Note, you don't have to be an investor to obtain such a loan. Homebuyers can obtain them as well, but again, they must put forth extreme amounts of collateral.

The Pros of Hard Money Loans for Real Estate Investors

Now that we've explained hard money loans for real estate investors, we can discuss their pros and cons. We'll begin with their pros:

Enable You to Close Deals in a Rapid Manner

The real estate market is hot right now. Houses are being bought almost as soon as they go up for sale. As such, the longer it takes for your loan information to go through, the harder it can be to buy a house you want.

This is one of the reasons that hard money loans can be advantageous. Because they're based on collateral and not financial standing, they can be passed through much quicker than alternative loans. And the quicker you can obtain your loan, the greater chance you have of snagging an available house.

Easier to Obtain Than Alternative Loans

When getting a conventional housing loan, you have to prove that your financial standing is up to snuff. Not only do you have to make adequate income but have little debt as well. As such, unfortunately, you might not be in a position in which you can obtain a conventional loan.

But do you know what you can obtain? A hard money loan. Hard money loan lenders grant loans based on the cost of the property you're purchasing, with the expectation that you'll be able to make more off of the property than what you're getting from the loan.

In other words, just about anyone can obtain a hard money loan for real estate investment. You have to show how the property will make you money after it has been purchased.

Have No Pre-Payment Penalties

Oftentimes, when you pay off a conventional loan early, you will be assessed a fee for doing so. This is because the lender expects to make a certain amount of money from the interest paid. When the loan is paid early, much of this interest is eliminated, and thus a fee has to be levied to make up for some of it.

But hard money loans are designed to be paid off quickly, usually within 1 and 5 years. As such, if you pay a hard money loan off early, you won't be assessed a fee. This provides you with the incentive to sell and make a profit as quickly as possible.

Learn more about the terms of hard money loans by speaking with mortgage hard money lenders.

The Cons of Hard Money Loans for Real Estate Investing

There are certainly pros when it comes to using hard money loans for real estate investing. But there are cons as well, including the following:

They're Costly

The most obvious con of hard money loans is that they're costly. Generally speaking, they have double the interest rates of conventional loans. Not to mention, they often come with hefty origination fees.

That said, if you're able to pay them off promptly, they can be hugely advantageous. Little interest will have accumulated and you'll have capitalized on your first investment property. This will enable you to pursue more investment properties in the future.

They're Risky

When you take out a hard money loan, you make a huge bet on yourself, the property you're investing in, and your ability to sell it promptly. If you win the bet, you're rewarded with substantial amounts of money. If you lose the bet, you stand to face foreclosure, which can ruin you financially for years to come.

Hard money loans can be beneficial, but you shouldn't take one out unless you have an ironclad plan. Assess the current value of the property, how much value you can add to the property, and how quickly you can get the property off the market. These factors will dictate whether a hard money loan is a good idea for you.

Taking Out Hard Money Loans for Real Estate Can Be Advantageous

At the end of the day, taking out hard money loans for real estate can be advantageous. But that doesn't mean you should do it on a whim. You should think long and hard before pulling the proverbial trigger.

Use the information relayed above, and you should end up making the right decision for your situation.

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