Hard Money Go provided the best financial solutions for real estate investors by offering various type of hard money loans in California and Texas.
Our unique investing model pools hard money lenders money into a fund to help them earn passive income. There is a lot of information floating on the web regarding hard money but we are presenting you with an ultimate and updated guide on hard money loan 2022 which will cover each aspect of hard money that you should know to get started.
So let’s jump right in.
What is hard money lending?
When an individual lends his private money as a loan by securing the borrower’s real estate assets, this is referred to as hard money lending. The business financing lenders are neither a bank nor financial institution. Lenders can be an individual or groups of individuals who invest their money in the form of a private loan. Hard money lending can be viewed as an investment that gives you a higher return in a minimum amount of time. By providing financing, a hard private lender such as one who provides hard money lending in Los Angeles does this to actively to earn a passive income by securing real estate as collateral to secure the financing.
The hard money loan is primarily used for real estate investment and transactions. When you borrow a hard money loan, the purchased property or real estate assets serve as collateral. The main purpose behind using a hard money loan is to invest in property to renovate or develop and ultimately sell it for profit. A hard money loan typically has a higher interest rate and higher fees, in return for being financed faster sometimes on a riskier borrower than on a conventional loan.
How does a Hard Money Loan work?
Hard money loans work similarly to asset-based loans. Your credit score and income does not play a role in qualifying for a hard money loan application. Hard money lenders consider the value of the current property to approve your loan application. While credit does not play a role, irregularities such as bankruptcy, bad title and others can affect ones ability to qualify.
In a hard money loan, one’s real estate assets will be used as collateral to assure that in the event that the borrower fails to make mortgage payments, the property will secure the lender from losses. Being approved for a hard money loan is dependent on the loan to value (LTV), which is the percentage ratio of the loan amount to the value of the property. Typically, hard money lenders do not approve borrowers for loans that exceed 80% LTV. Prior to approval, the lender evaluates the value of the property and checks whether the value of the property can cover the loan or not.
What Are Typical Repayment Terms for Hard money loans in Los Angeles ?
There are various loan programs, Hard money loans in Los Angeles typically have a shorter repayment term maximum of 5 years than conventional loans which range from 10-30 years. From a practical standpoint, no one would wish to hold a loan at a higher rate of interest for a longer period of time as the cost of funding can be very high on a longer repayment horizon.
Who can be a private money lender?
Anyone who has access to a large amount of capital or wants to invest a huge amount of their own money in the market, especially in the real estate market, can become a private money lender. A private money lender can be an individual or group of individuals who want to lend their money and earn a passive income in a shorter period of time. Generally, lenders are the busiest professionals who do not have enough time to oversee or manage their investments and wish to earn substantial rate of returns. That is why they choose to do private money lending.
Reasons to consider lending your private money:
Private lending is not everyone’s cup of tea. Like any other business, there are risks too. But if done well, it can be a great source of passive monthly income.
Some of the main reasons why people get into private money lending are:
- Having a huge amount of surplus income from your employment or business that can generate more income
- Actively building your retirement account
- For the diversification of investment portfolio
- Need passive income after retirement
- Wish to invest in real estate but can not do because of lack of time
- Trying to generate monthly income from your investment to cover living costs
If any of these applies to you, you can consider investing in private lending.
Where to find private lending deals?
If you have decided to dive into private lending, finding a good borrower is of the most importance and can be complicated. Of course, you can start looking in local areas. That may be your friend circle, family or a network of business associates that are investing in real estate or have a connection in the real estate market. Most of the lenders have their first deal with a ‘known associate’. But after some time getting into private lending, you should also look outside of your existing circle of contacts to find the best deal.
You can find borrowers outside of your circle by:
Real estate networking group:
Community meetings of real estate members are a great place to meet potential investors and borrowers. Plenty of potential real estate associates, investors, brokers attend the meeting and you will have a greater reach in the community by attending these meetings.
The best way to reach potential borrowers is through online mediums such as social networking sites and search engines. The online community of real estate associates help you to connect many borrowers simultaneously.
There are a lot of investment companies out there that act as third parties, matching the real estate investor with the lender. This includes investment Advisors, real estate investment companies, CPAs, and financial advisers. They charge introduction fees from borrowers. The cost of a third party advisor ranges from 3% to 10% of the loan amount.
Working with a Broker
Work with hard money brokers who have direct contact with numerous well qualified real estate investors who need access to capital. Some brokers have a local reach, while others have clients throughout California, Arizona, Texas, Florida, and others.
However, we suggest you connect with the borrower directly. Having a direct relationship with the borrower makes the landing process smooth and clear. Because sometimes third party advisors disappear amidst the deal when a borrower that they have introduced to you becomes default or when a deal goes bad.
Risks involved in private lending
Hard money lending can be a great source of earning passive income, but like any other business, there are also some risks that may lead to lenders losing some – or all – of their investment. The majority of losses are due to incompetence, bad due diligence, bad luck (unforseen economic circumstance such as Covid, inflation, etc) or willful fraud on the part of the Borrower:
- Failure in paying property taxes
- Houses with severe underlying construction issues such as foundation work
- Not rehabbing to a good standard – or at all!
- Failure to properly record liens
- Unable to sell/refinance
- Not ensuring clean title or no title insurance
- Rehabs being hugely over budget
- Market conditions suppressing resales
Why use a hard money loan when you can get a loan from Bank?
Have you ever thought about why real estate investors borrow hard money loans when they can borrow money from traditional banks or any traditional financial institution? Borrowers usually approach hard money lenders to fund their projects in case traditional banks have denied them due to their low credit score or any other reason. Not only this, there are some more reasons why real estate investors choose hard money loans over conventional loans. This may be because of:
One of the significant factors that prevent real estate investors and developers from obtaining traditional loans is the complication of the loan approval process. Traditional banks require a lot of document and paper formalities for verification. On the other side, hard money lenders focus only on the real estate assets that serve as collateral to secure their funds. They are more concerned about the value of the purchased property and your credit score and other paper formalities do not matter that much.
As hard money loans are offered by private lenders, it becomes easier for borrowers to negotiate on loan terms. Since the lender and borrower work closely and directly with each other, they can have tailored repayment systems as per the terms on which they both have agreed upon.
This is another significant factor why real estate investors and developers choose hard money loans over traditional loans. Conventional Banks take months to approve and fund you whereas hard money lenders take almost 2 weeks to close the loan.
Some special consideration for hard money loans in Los Angeles and San Diego
There are mainly two points that the borrower should consider before approaching getting a loan from a hard money lender in Los Angeles. The very first point is that a hard money loan is a short term loan. Generally, the borrowers have to repay the money with interest in 6 to 18 months. So the investors get very little time to repay the loan with interest. The second point that an investor must consider is higher rate interest on hard money loans. The interest rate on San Diego hard money loans generally ranges from 8-12%. The overall consideration is that the borrower has to repay the loan with a higher interest in a minimum amount of time. The ideal goal of the borrower should be to take on the hard money loan in the short term with the idea to refinance to a conventional loan with a better rate soon therafter.
Real estate projects do not wait longer for a specific investor as there are many developers ready to work on the same project. In this case, the investors who are ready with money to fund the project quickly, procure the project over other investors. So, a Hard money loan is the best option for those real estate investors who are in a quick search to fund their real estate project.
If you are trying to approach a hard money lender, you will come across mainly two types of hard money lenders: commercial lenders and residential hard money lenders. The main difference between the two is the type of property on which the lender will approve the loan.
Residential hard money lenders
As the name suggests, residential hard money lenders primarily deal with residential property. Residential hard money loans are intended for those investors who acquire or refinance a residential property. This loan is also known as a Mortgage Loan.
Commercial hard money lenders
Commercial lenders offer loans that are specifically designed for those investors who want to invest in commercial properties such as warehouses, hospitals, schools etc.,
Some Pro tips for choosing the right hard money lender
There are a number of hard money lenders who offer hard money loans to real estate investors and developers. They all differ from one another in terms of their services, locations and loan size. Choosing one among them that fits your needs and requirements becomes a perplexing task.
Here we are giving you some pro tips that will help you in choosing the right hard money lender for you.
Determine your own loan need
Hard money lenders offer you a variety of diverse real estate loans. Instead of looking for hard money services broadly, go into a niche and choose a lender that specializes in the type of loan that you are looking for. Different lenders may offer you different types of loans such as foreclosure, commercial properties, residential, fix and flip loans and rehab loans. So before approaching a lender, you must determine your own loan needs. If you have a clear idea about what type of loan suits your needs, you can easily choose one without being confused.
Find a local lender
Try to find a local hard money lender so that they can inspect the property in person. By doing so, you don’t have to waste your precious time educating the lender about the property and local real estate market. This way they will be able to work closely with you. A local hard money lender will be able to know you as a person and you can easily negotiate on terms and conditions.
Choose a reputed lender
You can avoid scams and mistakes by choosing a reputed hard money lender. Your application and funding process becomes easier if you choose a reputed and experienced lender. When you search for a private lender in your area, look for their experience, past funding transactions, reviews and feedback of their past clients. All these factors will help you to choose the right private lender for you. borrower is the key to avoiding any mistakes in business deals.
If you choose a private lender to work with, transparency of rates and services should be clear to you. It makes the whole process of the loan application, approval, funding, repayment schedule easier and hassle-free for you.
If you have received your fund from a hard money lender, you need to get to work quickly. Remember that a hard money loan is a short term loan. You have to develop your property as soon as possible and sell it in a reasonable amount of time. This way, you can avoid getting caught by the higher interest fees. Repayment of loan on time will help you to gain the trust of your lender and the lender will wish to work with you again.
If you intend on keeping the property for a long period of time, once you get the hard money loan, it must be your goal to get traditional financing with lower rates in the short period of time possible to avoid paying higher fees.
Additionally, always keep in touch with your lender. Update them on your business venture progress from time to time. Always provide information on time if requested. Communication between lender and borrower is the key to avoiding any mistakes in business deals.
Overall we can say that if done well, private money lending can prove to be a great way to get financing for your real estate investment deals. Especially if you want to generate more passive income and need financing fast, hard money lenders, although with higher rates, can be your secret tool to finance your next investment. The lender makes a good profit, while the borrower gets the financing they need.
Remember, hard money lending should be used as a temporary tool to secure the purchase or refinance of real estate. It is not a permanent lending solution. Go ahead and find your next suitable investment and contact a lender to get started.