You need fast financing for your investment property, but you’ve hit a wall. The project itself is invigorating, but funding it is a headache. You’re stuck wondering, “what are hard money loans, and are they worth it”?

Before spearheading the construction of your investment property you need to understand your financing options. Otherwise, you could end up losing more capital than you earn. This happens quite often, so every decision is crucial.

In fall 2021, RealtyTrac reported that a whopping 63% of investors list “rising home prices” as the #1 challenge in the real estate investment market. And as rates rise and prices stay stagnant, the obstacles remain in 2023.

If you want maximum profit on your investment, you’ll need to learn everything you can about hard money loans. 

Let’s begin.

Table of Contents:

• What is a Hard Money Loan? 
• Hard Money Loan Requirements
• Hard Money Loan Process
• Hard Money Loan Example
  
• Pros and Cons of Hard Money Loans

What Is a Hard Money Loan?

Hard money loans are short-term and secured by real property, mostly used for fix and flip projects. They’re perfect if you need fast access to funds for your investment property. 

Keep in mind: you might get a lower loan-to-value (LTV) than, say, a mortgage. That’s a small price for convenience and timeliness, though.

Usually offered by individuals or companies, hard money loans feature a much shorter funding time frame and payment terms are often negotiable. This is because they’re based on collateral (e.g. a house), instead of the applicant’s credit status. To compare, bank loans typically base loan approval and amount on the applicant’s credit report. 

While all hard money loans are short-term and secured by collateral, you can choose a hard money loan based on your prospective property.

• Hard Money Commercial Construction Loans – Builders use hard money commercial loans to finance real estate construction projects. You can typically count on a 12–24 month loan period – just enough time to finish the construction of their project.
• Fix and Flip Hard Money Loans – These last about 12–18 months, and are designed to help investors purchase and renovate a property, which they can then sell at a profit.

Convenience and speed to funding are major upsides of hard money loans, but investors should remember to prioritize higher loan-to-value ratios when choosing a lender. For example, Revolution Realty Capital offers up to 90% LTV for fix and flip solutions.

Hard Money Loan Requirements

Hard money loans require collateral, a down payment, and an exit strategy. The first and most obvious requirement for hard money commercial construction loans is your collateral. This will likely be the property you’re fixing up, as long as you have enough equity in it. 

To be clear: you can’t secure a hard money loan with a property you don’t own.

Next, you’ll need a down payment. Usually, the minimum will cost from 30–40% of the loan amount for commercial real estate and 20–30% for residential properties. 

Though, you can often find even better prices, with the right lender. 

Finally, hard money lenders will want to know about your exit strategy and how you plan to pay the loan back. Will you pay immediately after selling the property? Will you refinance the loan to buy more time? Having these details outlined ahead of time will prove that you are a reliable applicant. 

Now that you know the requirements of a hard money loan, let’s explore the process of getting one.

Hard Money Loan Process

With traditional loans, lenders put applicants through a vetting process where credit scores, proof of income, and more are considered for approval. Hard money loans are completely different. 

The stand-out feature of these loans is the speed of funding. If you’re investing in real estate, a quick turn-around is essential, which makes hard money loans perfect for opportunities like fix and flip properties. 

It’s crucial to create a  payment strategy. While hard money loans are fast and convenient, defaulting on the loan could cost you the property and any profit from selling it. Establish a plan to pay off your loan on time, even if the property rents or sells for less than expected.