Should You Borrow "Hard Money"?
“Hard money” is kind of like the anonymous cousin of a “partner”...
It’s not always easy or even possible to borrow money (or have enough of your own on hand) to invest in real estate. Mortgage lenders tend to go by pretty strict guidelines, numbers, and ratios. If your financial situation doesn’t fit into their parameters, you might have trouble getting a loan. Which usually leads to looking into getting “hard money.”
“Hard money” is not necessarily easy to get — someone who lends hard money will still scrutinize you and the deal — but it can be easier than getting a loan through more conventional lenders. They may not require that you meet as strict a criteria, and they may be more willing and able to lend money more quickly and/or with less red tape.
That isn’t to say that they won’t have red tape. They will.
Borrowing hard money will usually require that you give the lender some pretty hefty terms:
You’ll probably have to pay “points” — one percentage of the loan amount just to borrow the money. So, for instance, a hard money lender may lend you $200,000, but they will want 4 points just for lending you that much. In other words, they will want $8,000 on top of any other interest or terms of the loan. It will usually be paid upon the sale of the property.
They’ll likely only grant you a short term loan. (This isn’t a great option for a property you want to hold for a long period of time.)
The interest rate will be much higher than “normal” loans. (Think double, or more, the percentage rate of other loans.)
There are certainly times and reasons to get a hard money loan. If the numbers still make sense and it’s the only way to get a deal done, then by all means consider it. But always do the math and make sure it’s worth doing before signing on the dotted line. The terms will always be high and more in their favor than yours.