Hard Money: What is it? When to use it?
Real estate is shifting…money is tight. Would hard money work for you?
LeAnn here. When I got started in real estate, I bought condemned duplexes and four-plexes in central Minneapolis. I used hard money for the purchase/fix-up, but I didn’t flip the properties. I filled the units with tenants and refinanced, using the cash-out to buy the next multi-family…and repeated the process.
A hard money loan is simply a short-term loan based mostly on the property you're using as collateral. The hard money funds come from private investors or a fund of investors, as opposed to conventional lenders such as banks or credit unions.
Hard money is typically used on fix-and-flip projects or maybe as a bridge loan. The interest rate is higher because the risk is greater for the lender. It’s a short-term solution that may have huge consequences and penalties if you don’t pay it off in the time required.
It’s very important to personally KNOW your hard money lender. (Sometimes internet lenders aren’t what they seem.) If the rehab takes longer or something goes wrong, like our COVID-19 market right now, a personal relationship will allow a reasonable solution to the pay-back.
It's best to work with a coach to determine if this financing strategy is right for you and your project.