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Hard money lenders often get a bad rap that is largely undeserved. As with any industry, there are a few predatory practitioners, but the vast majority of hard money and private capital lenders are reputable lenders who want to help borrowers, not take advantage of them. Here are some facts to counter the myths that get spread around about these lenders:
- Hard money lenders are legitimate business owners. Their business is lending money, much the same as a bank. They are usually run as LLCs, S corps, or sole proprietorships, with a defined business structure and investment strategy. This is similar to how banks operate, except that private lenders don’t have to deal with the bureaucracy and federal guidelines that banks do.
- The name simply indicates that the loan is secured by a hard asset. In the case of commercial real estate investment, this is the property that you want to purchase. This really isn’t that different from bank lending either, except that the private lender is free to give more weight to the property value and less to the borrower’s credit score.
- Hard money interest rates are high for a reason. The high interest rates charged by private lenders aren’t predatory; they’re precautionary. They have to protect themselves from the high risk investments that they’re backing.
- Borrowers can still profit using hard money loans. Many deals benefit from the speed with which private lenders can close and others have a high enough profit margin that the interest rates have a minimal effect, but hard money doesn’t work for every deal. The important thing is to make sure you factor in the cost of a hard money loan to make sure it will work for your specific real estate transaction.
- Hard money loans can work for longer rehabilitation projects. A typical hard money loan term is six months to a year; however it is possible to get longer terms (up to two or three years) in certain circ*mstances. And while it is important to have an exit strategy (or two) before applying for a hard money loan, it is possible to get a six-month or one-year extension on your loan if unforeseen circ*mstances arise, just make sure to keep your lender in the loop.
- Even legitimate businesses use hard money loans. Small businesses often have difficulty qualifying for loans from traditional lenders and so will turn to private lenders for funding for capital equipment or continuing operations.
- Hard money is not 100% financing. Because of the high-risk nature of the loans that private lenders make, they like to see that their borrowers have skin in the game too. They’ll be hesitant to lend to someone who can just walk away at the first sign of trouble without any consequences. On the flipside, be wary of any lender who does offer 100% financing or other too-good-to-be-true terms.
- Hard money loans are good for more than just house-flipping. Hard money loans are often touted as the perfect solution for house flippers, but they can be useful for commercial projects as well, especially developments or rehabilitation projects on properties that can’t yet qualify for long-term bank financing or, here in Colorado, for marijuana-tenanted properties.
If you have more questions about hard money or private capital loans and lenders, contact Montegra at 303-377-4181.
