If you’re a hands-on kind of person, the idea of real estate investing probably has you itching to get your hands dirty. But, before you dive into renovations, it’s important to get the basics squared away first — like securing financing and choosing a property. These are both decisions that can have major impact on the overall success (and profits) of your venture, so doing your due diligence up front can provide better benefits down the road. If you’ve started looking into financing options, you’ve likely come across the concept of hard money loans. Since this loan option isn’t widely known outside of real estate investment circles, the question, “Are hard money loans safe?” inevitably comes up. Here’s what you need to know.
Hard Money Loans
When it comes to investment properties, the traditional bank-offered mortgage doesn’t quite offer the right benefits. A traditional mortgage is great for buying a home that will be your primary residence; however, investment properties have a variety of different needs that mean that typical mortgage isn’t enough or isn’t the right fit. Hard money loans step in to fill the need created by investing in real estate. The benefits include:
- Flexible terms — If your plan is to fix and flip a house, you aren’t likely to need a full 30-year mortgage. Hard money loans offer terms that range from a few months to a few years, depending on what you need.
- Flexible payouts — Most traditional loans provide enough funding to cover the cost of the land and structure. Hard money loans allow you to include additional funds for the estimated cost of the work you intend to do.
- Flexible financial requirements — The key difference between a traditional mortgage and a hard money loan is the collateral. Hard money loans use the property and/or land as collateral, so they can be more flexible about their financial requirements.
- Faster processing — The application process for your typical bank-offered mortgage takes a while to process. They want to be sure you’re a safe financial risk, so they will take time to comb through your financial history. With real estate investing, you often don’t have that long to wait for a loan to process. Hard money loans can be processed in a matter of hours or days rather than weeks or months.
Are They Safe?
Generally, yes, hard money loans are safe. Of course, there is always some inherent risk in any investment; there is no way to guarantee that your fixer-upper project will sell as well as you expect, and there’s no way to positively promise that you’ll always have great tenants if you purchase a rental property. The risk with hard money loans is that you’ll have trouble making the necessary payments or that your investment doesn’t pay off as well as you expected it to — which is essentially the same risk you run with any loan.
As long as you are taking your time to research and talk to hard money lenders about your intended project and your financial situation, hard money loans aren’t any more risky than other loan options. Under the umbrella of hard money loans, there are different options available that will work for different projects and investment types. Work with your local hard money lenders to discuss what you have in mind and which options will best fit your needs. That way, you can be sure your financing matches your project, which will minimize the risk of issues.