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How is Hard Money different than conventional money?
Most real estate investors know how to go about getting a conventional loan. Most investors have heard about Hard Money, but are not sure how to proceed to acquire a Hard Money loan. There are differences between the two and different uses for them. In this short article, I will explain those differences and how to best use them both to create a lasting career in real estate.
From where do the funds come?
Most investors know their local bank will lend on rental properties. However, most conventional lenders do not service the loans they give. They sell them off to other larger banks or other investors. Hard Money, on the other hand, is funded by private individuals. The money comes from individuals and many times it is pooled in funds by alternative lenders. These funds take the money invested within them and invest in real estate loans and are usually serviced by the funding groups that supply the funds.
How long can you take to pay off the loan?
Typically, if you take out a conventional loan, you have 20-30 years to pay off the loan. However, with Hard Money, they are in it for a quick return on their money. Generally, they are set up as shorter-term loans from 1-5 years that are amortized over 30 years, but at the end of the term, you have to pay off the balance. Most investors have no problem with that if they are planning on doing a fix and flip deal. However, what if you are planning to hold onto the property for rental income? You will have to pay off the loan or refinance it into a longer more permanent loan at the end of the term.
How quickly can you close?
This may be the biggest difference between Hard Money and conventional loans. As you know, conventional lenders are going to require appraisals and a lot of due diligence. They can take 30-60 days to close. When you need money for a deal very quickly, Hard Money can be as quick as seven business days.
There are differences in the costs of obtaining funding for both choices. Conventional lenders are lending over a long period (30 years) and thus charge lower interest amounts and, in exchange, make much greater returns over the longer period. Hard Money lenders, on the other hand, charge moreover a much shorter time frame. Generally, over the long term, you pay more with a conventional lender however, the fees and interest associated with Hard Money are higher in the short term.
There are many types of properties of which conventional lenders will not loan money. If a property needs work and rehab, the conventional lender will not loan for that property whereas a Hard Money lender will. If a property is vacant, a conventional lender will not lend money on that property but, a Hard Money lender will.
As you can see, there are uses for both types of funding. The funding choice you make depends on your plans for each transaction.
“I am very excited to be a contributing member of this publication. My goal in this column is to give you, the readers, valuable information in every issue. If you have any real estate related financial subject matter you would like me to cover, please send your suggestions to [email protected].”
Brian R. Hindman