Real Estate Investors - Can Hard Money Lenders Help Complete Your Projects?

Individuals continue to look at real estate projects as a solid smart money investment, and the global construction market is expected to grow by 11.8% between 2021 and 2022.

House sales have dropped each month during 2022, but the value of real estate has remained high. There was a record deceleration of price growth in July 2022. Price growth dropped by 2.3% between June and July of this year.

Higher interest rates temper the price increases seen after COVID-19 arrived. However, house prices continue to rise to make real estate investing attractive for many. But, sometimes financing cannot be arranged through traditional channels so alternative options have to be found. This is where hard money may become a good choice.

How do hard money loans work?

Hard money loans are always designed to be a short-term solution, and they are particularly suited to real estate and construction. An individual who is unable to obtain a loan from a traditional bank may approach a hard money lender. When you need to make a quick decision, you can take care of any urgent financial commitments by applying for a PaydayPot installment loan.

The lender would expect some form of capital, usually real estate or land, to be used as security. Because the risks in these loans can be higher than in regular mortgages, the interest rates tend to be higher. The amount borrowed will be linked to the value of the property. The LTV is usually somewhere between 65% to 75%.

One lender, DFW Hard Money lists several purposes for these loans on its website including land development, and project completion.

What projects are suitable for hard money loans?

Typically, anyone who needed a loan fast to complete some form of real estate project might approach a hard money lender. The reasons for this are multiple. Credit checks are usually not needed, the loans can be processed fast, and terms can be negotiated.

The interest rates are normally always higher than traditional loans, but in a high-inflation economy, hard money loans become more attractive. At the time of writing, the inflation rate year over year was 8.263%. As hard money loans are only used for the short term, and their interest rates are fixed, they become more appealing when inflation is sky-high.

The real estate projects that hard money loans can be used for are varied, and here below are some of the more common uses for this type of borrowing.

Fixing and flipping property

This is a very common reason to apply for a hard money loan. Fixing and flipping houses is becoming a very popular way to get into real estate investing. Over 9.5% of house sales in Q1 of 2022, came from house flipping.

However, even though anyone can start a business doing this, sometimes projects hit a snag. Renovations can run over budget, and if the housing market stalls it may take time to sell the property and recoup the investment.

Investors need to understand their market, and comping real estate helps them to calculate the possible ROI. But, if budgets aren’t calculated correctly, a short-term hard money loan may be needed to get the house to market.

Bridging between one purchase and another house sale

Sometimes hard money loans are known as bridging loans, or hard bridging loans. They are often used to bridge the gap between a house being purchased and another waiting to be sold.

Sometimes small businesses or individuals have to find alternatives to traditional banks. Hard money lenders are more likely to assist in a bridging loan than some other lenders due to the risk involved.

If you were buying a house at the same time as selling another you could be left in some financial difficulty. A hard money loan could be used to finance the purchase and give some time for the other home to be sold.

Construction projects

Much like house flipping, sometimes construction projects can stall. Inflation can push costs higher, and other lenders may be unwilling to provide the necessary finance to complete the project.

Back in 2019, digital assets outperformed other investments including gold and real estate. Yet, everyone knows what has happened to bitcoin and NFTs since. The housing market however soared in value after Covid arrived. This means that hard money lenders are perhaps more likely to see the value in helping a residential or commercial construction project to completion than a traditional bank.

Summary

Hard money loans are used to help commercial projects to reach completion. But, they can also be used by individuals to flip houses, develop land, or just bridge the gap between one purchase and another sale.

They are mostly suitable when a real estate project can be completed within a few months and a year maximum. During this short period, and with inflation rates as they are, the higher cost incurred by a hard money loan becomes less of a concern. Especially with property prices still rising, albeit at a slower rate.