What is Hard Money?
“Hard Money” is a term for a particular type of asset-backed lending that uses assets such as real estate property for collateral and is most commonly funded by investors or private companies. This industry blossomed in the US during the 1950’s when a tremendous amount of changes took place in the regulation of the finance industry and has been attributed to both negative and positive impacts to the economy.
Who Uses Hard Money?
Investors sometimes use hard money to finance new investment activity; however, it is more common for individuals and young corporations to use this type of financing because they may not have the ability to obtain traditional financing through banks, credit units, or private investors. These can include, but are not limited to: commercial developers, property rehabbers also known as house-flippers, home builders, and those with poor credit.
The Advantages of Using Hard Money
There are many benefits to borrowing through Hard Money lenders. The qualification process is simplified, which usually allows for rapid closing, and Hard Money also provides borrowers with the ability to negotiate and close on multiple deals simultaneously while offering the ability in most cases to leverage your money almost 3-1—versus typical bank financing which may finance a much lower portion of the property or asset’s equity.
Hard money comes with a high interest rate; typically the loans range from ten to eighteen percent and follow closely with the rate set by usury laws in the lending jurisdiction. Hard Money loans also often come with shorter repayment terms and cause some borrowers who are unable to pay off the note or refinance the property within the term to become subject to foreclosure and to potentially be held personally liable.
Borrowing quick money despite considerable interest and unfavorable terms may be a good idea to help you close that deal you have always wanted or finish that project, but ensure that you know what you are agreeing to and always devise a backup strategy.
Speak to a financial advisor or financial professional to determine if there is a type of financing that is right for you.