You are looking to buy a piece of real estate for investment purposes. You’re likely going to need financing, so where do you go? The good news is that you have options. You can try a traditional lender – like a bank or credit union. You can try a broker who has access to third-party lenders. You could also go the hard money route.
Hard money is private money. It is provided by lending firms made up primarily of individual investors or managers of investment funds. Despite what you may have heard, hard money lending isn’t a lending option of last resort. Investors specializing in real estate tend to prefer hard money as the first option.
So, how do you access hard money for real estate? It starts by looking around for a lender whose business model lines up with your goals.
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1. Lenders Have Their Niches
It turns out that hard money lenders have their niches. If you are looking to buy a strip mall or an office building in Salt Lake City, UT, a firm known as Actium Partners would probably be on your list of lenders to check out. Hard money and bridge loans for real estate are their niche.
On the other hand, if you are eyeing residential real estate as a fix-and-flip investor, Actium cannot help you. They don’t do fix-and-flip loans. There are other hard money lenders that do though.
2. Make Sure You Have Collateral
Hard money lending is asset-based lending. This means that you will be required to put up collateral as backing for any loan you receive. In 99% of all real estate transactions, the property being obtained is also the collateral on the loan. That being the case, be prepared for a loan amount that is significantly lower than the value of the property.
Borrowing more money is possible if you have another asset of higher value. Maybe an already developed project can act as collateral on the purchase of an undeveloped piece of land.
3. Prepare Your Pitch
You will have to submit a loan application just as you would with a traditional lender. But oftentimes, borrowers pitch their projects to hard money lenders as well. The goal is to get the lender on board with your project by thoroughly explaining your plans.
This includes explaining your exit plan. Hard money loans are short-term loans with terms that are rarely longer than three years. Most hard money deals are for two years or less. In addition, lenders expect borrowers to have solid exit plans in place. An exit plan is simply your plan for paying off the loan when it comes due.
4. Get Your Documents Together
You will probably appreciate the fact that hard money lenders do not require reams of documents in support of a loan application. But some documentation is required. Find out what you’ll need to produce up front. That way, you will be able to submit the documents along with your application. This speeds up the process considerably.
Some of the documents you’ll need will relate to the property being purchased. The lender will need to know where the property is located, what you intend to offer, and so forth. An appraisal will have to be done before the lender can reach a decision. So be prepared for that as well.
That’s about all there is to it. If it seems like hard money is uncomplicated, you’ve hit the nail on the head. One of the reasons hard money lending is so efficient and streamlined is that lenders avoid complicated application and approval processes. Accessing hard money is a lot easier compared to traditional financing.